Both Sides of the Table

OCTOBER 12, 2014

This might happen because to meet all investors needs they end up selling too much of the company, taking too much dilution and feeling beat up. Aren’t they getting screwed? Sometimes entrepreneurs get screwed. If you listen to conventional wisdom this is the only thing happening. As I like to point out, the truth is often more nuanced.

Technical Review 336

Technical Review Later Stage Early Stage LP 336

Both Sides of the Table

SEPTEMBER 17, 2011

Dilute your cash, equity or both. But it will not help your business grow faster. What will it do? Focus the most senior person in the company’s time away from critical decision making on daily business. Create hassles for post-merger integration of technology or teams. Lead to bad blood on your existing team.

Operations 292

Operations CTO Hire Startup Early Stage 292

Both Sides of the Table

MARCH 19, 2013

That it is non-dilutive financing? Let’s say you can supplement that with $1 million in professional services revenue at $500,000 gross margin. Need I point out that the $500,000 is still profitable revenue that can contribute to your central costs of running your business?

Technical Review 403

Technical Review Software Review Startup Churn Rate 403

Both Sides of the Table

AUGUST 14, 2017

Boards are not appointed to be founder-friendly lapdogs for the 1–3 founders who start companies and usually own the largest equity positions in the company.

Cofounder 217

Cofounder Stock Options Equity Technical Review 217

Both Sides of the Table

FEBRUARY 17, 2011

If you are able to raise money from credible sources at a reasonable dilution percentage then I personally favor getting the round done now and building your business. How much dilution am I going to have to take now? So if you can take 27% dilution for $1.5 25% dilution). But this is the exception, not the rule.

Pre-Money Valuation 303

Pre-Money Valuation Dilution Valuation PR 303

Both Sides of the Table

FEBRUARY 19, 2019

This is often true when the action of the board could dramatically affect shareholders such as raising new capital, acquiring new businesses (that drain existing cash or dilute shareholders), selling the company or raising a lot of debt.

Startup 204

Startup Dilution Government Stock Options 204

Both Sides of the Table

FEBRUARY 20, 2019

For starters, the incoming CEO will demand between 4–6% of the company so shareholders will immediately face dilution. With that said, no venture capital firm really wants to replace a CEO. If the Founder & CEO is popular the company faces risks of executive departures and customer defections.

Venture Capital 236

Venture Capital Startup Angel Investor Silicon Valley 236

Both Sides of the Table

MARCH 21, 2013

It also is a great way to finance your business without facing dilution before you actually raise venture capital and when the valuation you might get from angels is less than you’d want. So it wouldn’t bother me if 90% of your year-one revenue was PS provided it was done with a specific plan for year-2 software sales.

Software Review 321

Software Review Software IP Technical Review 321

Both Sides of the Table

JUNE 5, 2015

When you do, my 20% becomes 15% and thus my true price for your round is actually higher than it appears when I invested because I already know I’m going to face more dilution for options. Option pool (likely dilution in the future, which is a function of a higher price just not yet defined). Size of my check. No problem.

Pre-Money Valuation 150

Pre-Money Valuation Option Pool Post-Money Valuation Dilution 150

Both Sides of the Table

JANUARY 4, 2014

It either needed to get more aggressive in pricing, pivot to a new business or business model or raise more capital (and take the dilution) in order to have more time to figure things out. The company hadn’t performed well financially and need to make changes. We sat down the three of us.

Founder 340

Founder Sacramento Cofounder Technical Review 340

Both Sides of the Table

OCTOBER 1, 2009

If you’re raising $2 million and can close on $3 million – don’t optimize to minimize short-term dilution, optimize for contingencies in case the market gets worse. My advice : if you’re raising a $750,000 round and you have demand for $1.2 million – take it.

Technical Review 269

Technical Review Stock Hawaii Early Stage 269

Both Sides of the Table

SEPTEMBER 28, 2014

I have long advised startup companies to “ raise capital at the top end of normal ” and by that I mean it’s ok for founders to want to raise at a high price (and thus minimize dilution) but if your valuation is completely out of whack with your underlying performance and if you ever need to raise more capital it becomes VERY difficult (..)

Burn Rate 383

Burn Rate Balance Sheet .Net Valuation 383

Both Sides of the Table

JUNE 17, 2017

That management team might have decided that they wanted to maintain more control of their company, didn’t want new board members and didn’t want to take dilution. Stock option grants dilute your ownership in the company. I also wouldn’t be so quick to say that Company B is run worse than Company A.

Stock Options 227

Stock Options Startup Dilution Venture Capital 227

Both Sides of the Table

OCTOBER 11, 2009

You can go as high as 1% because they’re going to get diluted when you bring in VC. But if you approach them with a very fair valuation and ask for a small check (say $10k, which should be nothing to someone in this position) I believe you’ll have a reasonable shot at it provided that you actually have an interesting company.

Advisory Board 306

Advisory Board Startup Equity Valuation 306

Both Sides of the Table

SEPTEMBER 25, 2010

The key is making sure the second close isn’t too high (I think 50% of X sounds about right) because you’ll be adding on that dilution to yourself & “X&# investors will own less of the company. This gives you the ability to get the first money in the bank while giving you flexibility in size of round.

Finance 286

Finance Term Sheet Technical Review Warrant 286

Both Sides of the Table

NOVEMBER 14, 2017

Raise too soon and likely take on more dilution, wait and get valuation up (as our metrics continue to rise) but then run to a point where you have a lower cash balance and place more risks on the business. These are the hard problems we’ll have to address in the year ahead along with the perennial, “ When should we raise more money?

Operations 286

Operations New York City Technical Review Startup 286

Both Sides of the Table

JULY 16, 2013

Because at least while the VC spigot is open and flowing for high-potential individuals that fit a pattern that some VCs seem to favor they can access cheap capital that isn’t terribly dilutive and can use the to fund development and swing for the fences with limited focus on monetization. And the dilution that goes with it.

Burn Rate 412

Burn Rate Dilution Revenue Valuation 412

Both Sides of the Table

SEPTEMBER 10, 2021

A-Rounds used to be $3–7 million with the best companies able to skip this smaller amount and raise $10 million on a $40 million pre-money valuation (20% dilution). So in a way it’s self selecting. These days $10 million is quaint for the best A-Rounds and many are raising $20 million at $60–80 million pre-money valuations (or greater).

Pre-Money Valuation 471

Pre-Money Valuation Valuation Venture Capital Early Stage 471

Both Sides of the Table

SEPTEMBER 28, 2013

Dilution / valuation. I hate when companies publish too much information about the total stock option allocations, the company valuations, the dilution faced in every round, etc. I wasn’t expecting this much dilution this quickly.” Most employees want cruising altitude, most founders live in take off mode.

Startup 417

Startup Dilution San Diego Stock Options 417

Both Sides of the Table

APRIL 14, 2012

Is your crappy little 12-person company really worth they and their shareholders diluting by 2% given more than a decade they’ve put in building one of the Internet’s most solid business social networks? You just said, “nobody would take 1-2% dilution.” They’re worth $11 billion as of today. Hang on, Mark.

Valuation 316

Valuation Balance Sheet Dilution Term Sheet 316

Both Sides of the Table

DECEMBER 1, 2009

I know that people find safety in numbers (and there always seems to be 3 amigos) but imagine this for a moment – you go and raise venture capital and you’re fighting over whether to dilute with a VC by 25% or 30% as a company.

Hiring 289

Hiring Cofounder Dilution Startup 289

Both Sides of the Table

SEPTEMBER 18, 2014

And now I have to explain to team that they’re taking more dilution than they expected if we do a down round. Me: More dilution? But people seem pretty focused on that number. Raising lower seems kind of like something is wrong. A down round? I thought it was a convertible note with a cap? Him: Um.

Venture Capital 417

Venture Capital Liquidation Preference Valuation Term Sheet 417

Both Sides of the Table

MAY 30, 2018

If a VC prices a flat or down round it means that management teams are often taking too much dilution. If I assume 20–25% dilution that implies a price of between $20–28 million pre-money valuation ($25-$35m post-money). But there is also another very rational reason. Maybe she wants slightly higher but she certainly won’t want lower.

Valuation 324

Valuation Post-Money Valuation Pre-Money Valuation Cofounder 324

Both Sides of the Table

JUNE 5, 2011

But the reality is that you’re faced with two problems: 1) the earlier the stage the riskier and thus more write-offs so you need to have enough ownership percentage in your winners to make up for the losers and 2) the earlier stage your check the more likely the company will need many more funding rounds behind you and thus you face dilution.

Pre-Money Valuation 336

Pre-Money Valuation Valuation Silicon Valley Stock 336

Both Sides of the Table

MARCH 21, 2010

Future investors aren’t likely to mind that you had a PBW program because the dilution will be taken before they invest. Every share option you allocate to an employee is dilution both you and your investors face so they shouldn’t be allocated lightly. You obviously also need the consent of any investors you have.

Warrant 298

Warrant Dilution Startup Stock Options 298

Both Sides of the Table

JULY 25, 2010

I’d far rather dilute 10% early and get some investor traction than to wither for another 3-6 months trying to get my seed round together. And to echo what Fred Wilson said in his post about AngelList – it is social proof on steroids.

Silicon Valley 293

Silicon Valley Technical Review Southern California Angel Investor 293

Both Sides of the Table

SEPTEMBER 29, 2009

The other investors around the table didn’t agree nor did the “independent” board members who were willing to turn a blind eye to capital inefficiency since they didn’t have any economic interests that would be diluted by continued fund raising to support a capitally inefficient management team.

Burn Rate 263

Burn Rate Valuation Pre-Money Valuation Private Equity 263

Both Sides of the Table

OCTOBER 7, 2014

My speculation is that entrepreneurs had more options and wanted to take less dilution so the old $5 million for 33%-40% of your company no longer made sense and on the VC side it made no sense to pay $20 million pre ($25 million post, which implies the VC gets 20% of the company = 5/25). Why the latter?

Cap Table 399

Cap Table Silicon Valley Term Sheet Finance 399

Both Sides of the Table

APRIL 21, 2013

Given the brand dilution going on with the name Sriracha how can he still grow his business? He can’t trademark it since it’s the name of a city. By the way, he has never spent a dollar on advertising. Provide something distinctive. What will you be known for? The distinctive design of his packaging. That crazy rooster.

Vietnam 415

Vietnam Los Angeles Entrepreneur Thailand 415

Both Sides of the Table

MARCH 9, 2013

Should you raise $3 million in stead of $2 million even though it means more dilution so that you will have a longer runway? Or maybe their existence itself will help accelerate fund raising. Who the f**k knows? But YOU have to make that tough judgment call. Is it better to have 2 VCs in the deal at 12% each or one at 24%?

Cofounder 413

Cofounder Burn Rate Dilution Valuation 413

Both Sides of the Table

JULY 17, 2018

Hire when it feels like you're bursting at the seems or missing a critical skill on existing team or have figured out how to scale growth  —  @msuster 6/ Raising capital at very high prices helps avoid short-term dilution. But if you raise at too high a price you make it harder to raise next round.

Founder 242

Founder Dilution Software Review Later Stage 242

Both Sides of the Table

SEPTEMBER 25, 2011

Pro-rata rights are designed to protect investors from being diluted in future rounds of financing, which is an important way for VCs to protect the investments they make early that turn out to be super successful. As though 18% of a big company is a terribly embarrassing outcome. What are “super” pro-rata rights.

Entrepreneur 310

Entrepreneur Dilution Finance Silicon Valley 310

Both Sides of the Table

JULY 25, 2011

Founders don’t often think about “primary&# stock vs, “fully diluted&# stock in terms of voting rights. But know that every term in your term sheet is there as a result of some dispute of the past between shareholders or between shareholders & management. I never did.

Liquidation Preference 304

Liquidation Preference Term Sheet Cap Table Participating Preferred 304

Both Sides of the Table

MAY 15, 2010

Should we delay raising money even though we might take more dilution because we haven’t hit our milestones? Or having the tough conversations with their senior leadership to say why you can’t continue to allocate resource?

Dilution 299

Dilution Hiring Partner Employee 299

Both Sides of the Table

SEPTEMBER 5, 2012

In a standard VC term sheet there is a standard term called an “anti dilution provision” and they are in nearly 100% of deals. It has nowhere near the same dilutive effects as a full ratchet except in extreme edge cases. But my $500k, while only buying 10% of the company (and now diluted down to 7.5%

Liquidation Preference 354

Liquidation Preference Ratchet Equity Stock 354

Both Sides of the Table

MAY 9, 2011

Conventional wisdom says that you gain far more in working as a team than you lose by diluted by half before you start. Either you’re not technical and you think you need a technical co-founder or vice-versa.

Cofounder 393

Cofounder Founder Vesting Founder Vesting 393

Both Sides of the Table

APRIL 25, 2011

Service as a bridge to a product business - One of the best ways for young startups to finance their business without any dilution is what I call “customer financing,&# which is mostly only possible in businesses that target businesses rather than consumers. There are at least two types of tech services businesses in my mind: 1.

Silicon Valley 332

Silicon Valley IP Dividend Finance 332