Meaning
Gradual changes in the relative ownership percentages of stakeholders occur when new shares are issued or existing rights are exercised without a proportional adjustment for all parties. Equity drift is a mathematical consequence of capital raises and employee option exercises. It serves as the record of divergence between the initial allocation of stock and the actual ownership structure as the company matures.
Dilution Impact
The primary cause of this phenomenon is the introduction of new capital that requires the issuance of fresh shares. While equity drift is expected in a growing company, it results in unexpected dilution for those who do not maintain a pro-forma cap table. Each subsequent funding round layers new preferences onto the existing structure, reducing the percentage held by earlier participants.
Record Discrepancy
Differences between what a founder remembers and what the legal records show can lead to friction during a sale. Equity drift is often discovered during the due diligence process when a buyer verifies every share issuance since incorporation. If the records are not updated in real time, the sudden realization of a lower ownership stake can halt a transaction.
Prevention Method
Maintaining a live capitalization table is the only way to track these changes accurately. This record provides a clear view of the current and fully diluted ownership at any moment.
