The Dilution Tax: How a 44x Markup Becomes a 8x Return

Dilution is an often underestimated factor for retail investors getting started in private markets investing. Then you add management fees, carry, SPV setup fees, brokerage fees on the sale of an asset (if done before a formal liquidity event), and others—and very quickly, amazing valuation markups can turn into just okay returns on capital.

If you had invested in Anthropic's Series C at an estimated $4.1B valuation, today on paper based on the Series F pricing of $183B, you'd be looking at an astronomical 44x markup on a valuation basis. That's incredible for a 2-3 year period, and no one would complain about those returns; that's what everyone wants!

Unfortunately, that’s not the returns investors will receive; in fact it’s much much worse... Let's start with the biggest reason why: dilution.

The Two Drivers of Dilution

There are two major factors that drive dilution, and they can make those valuation markups shrink quickly.

The first and biggest is new equity raised. If your business is worth $10B post-money and you raise $1B as part of that round, all existing investors were diluted ~10%.

The second is equity compensation, which in AI lab land is very significant. Equity packages are getting huge, with terms rarely seen elsewhere. OpenAI, for example, just announced they got rid of all vesting cliffs (most startups have 1-year cliffs).

Anthropic: A Case Study in Dilution

Dilution has had a huge impact on Anthropic. One of the largest contributors came from the "Cloud-Equity" Wave of late 2023 to 2024 (though it's still happening today), in the form of the Amazon and Google deals. In a span of six months, Amazon and Google committed many billions to Anthropic when the company was still worth in the high teens to low twenties of billions. These weren't just cash infusions; they were often structured as "compute-for-equity" or included heavy commitments to use the investors' cloud infrastructure (AWS and Google Cloud). 

This significantly increased the share count held by corporate strategists and diluted earlier investors massively. It's estimated that Amazon and Google may hold over 30% of the business combined. And then of course there were other raises—several billion dollars earlier in the year and most recently the $13B raised in the ICONIQ-led round. That's a lot of equity to take on.

The Talent War Tax: To win the AI talent war against OpenAI and Google, Anthropic has had to offer enormous equity packages.

• The Scale of Grants: As of late 2024 and 2025, Senior Software Engineers and Product Managers are reportedly receiving equity grants worth $200,000 to $1m+ per year.

• The Dilution Hit: To keep up with its headcount growth (which almost 10xed from 300 in late 2023 to an estimated ~3,000 today), the company has had to "top up" its employee option equity repeatedly. Analysts estimate that between the Series D and Series F rounds, the cumulative dilution for existing shareholders—specifically to fund new employee grants—has been double digits, separate from the dilution caused by raising capital from investors.

So what’s been the impact? While the valuation was up ~44x from the Series C to Series F, the price per share is only up around ~12x - that is approximately 72% dilution from over the 2.5 year period. 

The Fee Stack Makes It Worse

Okay, ~12x for 2-3 years of an investment—still hard to complain. 

But if you're an investor in a SPV with fees, carry, and other expenses, things get worse quickly.

Let's walk through it:

• Management fees: Let's say there's 10% in all in management fees, and that capital is collected upfront (which is the case with many SPVs). Then only 90 cents of every $1 you invested actually went into the company. Your ~12x price per share markup now becomes a ~11x markup.

• SPV Admin fees: Now let's say your SPV setup fee was 2% for the SPV.

• Other fund expenses: Legal, audit, and escrow fees are typically passed through to LPs on top of everything else. These are smaller—often 1-3% collectively—but they chip away at your return further. 

• Brokerage fees: Let's say the GP sold your shares at the Series F. There could be a 5% broker fee attached to the deal, especially where they need capital markets support to exit. 

• Holdbacks and reserves — A portion of proceeds may be held back at exit for indemnification, and GPs may retain a fund wind-down reserve for final expenses that may not fully distribute.

After stacking all these fees, your ~12x markup is closer to ~9x before carry. 

• Carried interest: That vehicle also probably had carried interest as a benefit to the GP who brought you the deal. That's typically 20%, but can be more or less. So at 20% carry on the profits, now you're looking at a ~7.5x markup once the GP takes their carry.

The bottom line: You put capital into a company with a 44x valuation markup, but you're walking away with a ~7-8x  return before taxes. It may be even less if there are stacked fees (may happen in single or double layer SPVs), higher management fees or other fund expenses not accounted for. 

That's still great—7x+ DPI in 2.5 years is awesome—but a big disappointment if you didn’t fully understand dilution dynamics, especially in some of these highly capital intensive businesses. 

What Can You Do About It?

Here's how to think about dilution when evaluating private market opportunities:

Understand capital intensity. Highly capital-intensive businesses—robotics, defense, AI labs, frontier tech—will take on significant dilution, especially if you're investing early. Before committing, estimate how much total capital the company will need to reach profitability or a realistic exit. If the answer is in the billions, expect your ownership to shrink 50-70%+ by the finish line. Unlike public markets, private companies rarely buy back shares—dilution only compounds. Model accordingly.

Factor in talent competition. Equity dilution doesn't just come from fundraising—it comes from hiring. In talent-competitive industries like AI, companies burn through their option pools fast, then expand them. Ask about the current option pool size and the company's hiring plans.

Seek out capital-efficient businesses. Not every private company dilutes like an AI lab. Businesses that can reach profitability quickly—or that operate in less capital-intensive sectors—often deliver valuation gains that actually flow through to share price. We have an AI application company in our portfolio that went from a ~$20M valuation to $220M in two years with only one small funding round. Team of ~20, already profitable. Nearly the entire valuation increase translated to share price increase. That's the difference capital efficiency makes.

Ask about pro-rata rights. If you're investing through an SPV, find out whether the vehicle has pro-rata rights in future rounds. The ability to invest more later—at the same terms as new investors—lets you maintain your ownership percentage and offset dilution. Many SPVs don't have this, or are unable to exercise it. 

Model the full fee stack. Valuation multiples are vanity metrics. Build a simple model that accounts for estimated dilution, management fees, carry, and other fees on exit. A 20x markup can easily become a 5-6x net return once everything is factored in. That might still be attractive—but you should know it going in, not when the wire hits your account.

The Bottom Line

Private market investing can generate phenomenal returns, but the headline valuation multiples you see in the press rarely tell the full story. Dilution from capital raises, dilution from equity compensation, management fees, carry, and transaction costs all take their cut.

None of this means you shouldn't invest in private markets—the opportunities can still be exceptional. But go in with your eyes open. Understand the capital intensity of the business, the competitive dynamics for talent, and the full fee structure of your investment vehicle.

The investors who do well in private markets aren't just the ones who pick winners. They're the ones who understand what they'll actually take home when those winners exit.

Disclaimer: The information provided in this newsletter is for informational and educational purposes only and does not constitute financial, investment, or legal advice. The discussion of potential IPO candidates, valuations, and market conditions reflects publicly available information and should not be interpreted as a recommendation to buy, sell, or hold any securities. Past performance is not indicative of future results, and investing in IPOs and private companies involves significant risk, including the potential loss of principal. Readers should consult with a qualified financial advisor before making any investment decisions.

Follow the Last Money In authors on LinkedIn

✍️ Written by Zachary and Alex