If it was $50M on $500M post, then it's just a bit more than 10% dilution, which isn't too bad. But either way, that $50M buys two things: (1) a floor on near-term future price negotiations, and (2) a strong signal that they were nowhere near needing to sell and instead that they could go another 18+ months growing their walled garden of eyeballs. That second point could have spurred a big company like Facebook to overpay a little now rather than having to risk squelching an upcoming competitor a year from now at a GeoCities-like price.

It could've gone like this:

Facebook: We'll give you $600M

Instagram: No, we want $1B

FB: No deal

Instagram: Ok we're going to raise our own money

FB: Good luck with that

IG: See, we raised our own money and just closed it too and our Android app has 1M downloads on Google platform...

FB: panic Okay lets do $1B