How does equity dilution work for startups?

Gust

Equity dilution works when the same pie is divided among more people. Because the total percentage of equity will always equal exactly 100%, every time anyone gets another piece, by definition it “dilutes” all of the previous equity holders.

Understanding How Dilution Affects You at a Startup

Both Sides of the Table

Dilution. million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). But understanding how you’re likely to get diluted over time is a more difficult concept. So here is our crack at explaining the world of dilution to you.

Dilution and Investors and Tension

ithacaVC

Here is the big problem with investors – they dilute the founders’ ownership in the company. Let’s cover some basics: It is impossible to issue stock to investors without existing shareholders (founders, employees and prior investors) being diluted. It is impossible to do a stock for stock business combination without existing shareholders being diluted. But now the diluted shareholders own a smaller piece of a larger pie hopefully.

Should I give my seed investors anti-dilution protection?

Gust

What this investor is seeking is called “permanent, full-ratchet, anti-dilution protection”, and that is neither (a) in line with the market, nor (b) practical. Even if you were willing to give it to him, it is highly, highly unlikely to stand up beyond the next financing round, because there’s no way your next investor is going to take a dilution hit for this first one.

Mathematical vs. Economic Dilution of Startup Equity: Thinner Slices of an Extra-Large Pizza

Gust

Let’s get right down to business: Dilution of founders’ and other early shareholders’ equity in startups is frequently a subject of intense interest and debate. That’s the concept of what some call mathematical dilution.

Non-Dilution Rights are Wrong

The Startup Lawyer

I hate non-dilution rights and if you are an entrepreneur you should, too. I’m not talking about price-based anti-dilution protection that is typical in an angel or VC round. What I’m referring to is a right given to a particular stockholder so that such stockholder’s equity in the company is not diluted by any future issuance of stock — regardless of the price. Startup Issues non-dilution startup

Early Employee Dilution

ithacaVC

But here is one that I want to focus on in this post: “Can I ask for undiluted stock (non dilution clause)?” I am not even sure what “undiluted stock” is, but safe to say the person (I will call him Exec X) meant stock that his equity would not be dilutable in terms of ownership. It is legally possible to grant non-dilution via a contractual right. Those additional grants would prevent Exec X from being diluted.

The fine line between dilution and delusion

BeyondVC

I can also say that there is a similarly fine line between dilution and delusion but this one is easier to draw. So if faced with this situation, my only word of advice for entrepreneurs is that it is important to know that there is a fine line between dilution and delusion. The post The fine line between dilution and delusion appeared first on BeyondVC.

Walker Twitter Highlights: March 25th – April 7th

Scott Edward Walker

“Be careful not to have too many co-founders; it’s the most expensive dilution you’ll ever face.” Twitter Highlights co-founders dilution quora seed seed finance startup startup ideas startups I’m using Twitter as a form of micro-blogging to share interesting blog posts, articles and podcasts relating to entrepreneurship and startups, M&A and legal issues. Below are my five most popular tweets (via bit.ly ) for the past two weeks.

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Size of Pie, a.k.a. What Type of Entrepreneur Are You?

OnlyOnce

Although David is talking about taking in outside capital and founder dilution in pursuit of larger business growth and objectives, he is also getting to the same point about entrepreneur type. Business Entrepreneurship Venture Capitalists dilution entrepreneur equity Founders scalingSize of Pie, a.k.a. What Type of Entrepreneur Are You? Mmmm…pie.

8 Great Reasons to Bootstrap Your Startup

Early Growth Financial Services

Bootstrapping helps you to focus on your product in so much as … Continue reading → Financial Planning bootstrapping dilution enterpreneurship entrepreneurs equity fundraise profit margins self-fund small business financial planning startup startup financials vc venture capitalOriginally published in SoCalTech. To self-fund or to raise funds? That’s the big question that many founders ask themselves as they try to get their product and service to market.

7 Best Strategies for Maintaining Equity

Early Growth Financial Services

Whether you’re funded, seeking funding, or still bootstrapping, here are some of the best strategies for avoiding dilution and maintaining maximum equity: 1. Doing so will prevent unnecessary dilution and it allows you to get the highest possible value for each round. Of utmost concern to many entrepreneurs is how to retain maximum equity in their startups. Rightly so. It’s a constant balancing act: growing your company without losing control of it.

Should I Use My Investor’s Lawyer?

Scott Edward Walker

For example, he will explain to you how the liquidation preference works and run spreadsheets, if necessary, to show you how much money you will receive based on different sale scenarios; he will explain to you how the option pool works, including the founders’ significant dilution; and he will discuss what protective provisions are and other tricky legal terms, such as drag-along rights and anti-dilution provisions.

What Are the Rights of Minority Stockholders?

Scott Edward Walker

Startup Issues anti-dilution provisions controlling stockholders conversion rights derivative claim fiduciary duty inspection rights liquidation preferences minority stockholders oppression proper purpose redemption rights

Acknowledging The Value of Coaching and Therapy for Founders

Feld Thoughts

First, Felicis Ventures is committing 1% on top of every check the firm writes in non-dilutive capital earmarked for “founder development” in coaching and mental health. I’ve long written about the stigma around entrepreneurship and depression / other “mental health-related issues.” ” I was delighted to see two articles in the last day about others addressing this.

This Is How Successful Brands Reach More Ideal Customers

YFS Magazine

Before you think about diluting your brand offering or price in order to serve everyone and anyone, here are five strategies you can use to attract the right customers.

5 Criteria For Splitting Equity In Your New Venture

Startup Professionals Musings

Of course, all co-founders need to remember that allocated percentages will be diluted as angel and VC investors are brought in. Keep your wits about you to make sure that dilution is done equitably and evenly.

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What do investors consider the most important aspect of a potential deal?

Gust

Valuation, Size of Raise, Amount of Investment, Form of Investment, Liquidation Waterfall, Option Pool, Board Composition, Anti-Dilution Rights, Protective Provisions, Founder Vesting, *original post can be found on Quora @ : [link] *. Characteristics of the Entrepreneur. Integrity, Passion, Startup Experience, Domain Expertise, Functional Skills, Leadership, Commitment, Vision, Pragmatism, Flexibility, Personality. Characteristics of the Venture.

Some Quick Things Every Founder Should Know

Both Sides of the Table

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.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

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). Then you’ll willing to take more dilution for them. As I mentioned if you raise $2m on $8m pre-money you take 20% dilution.

Seed Round Pricing (Actual data warning!)

This is going to be BIG.

For those of you that have trouble doing division, not surprisingly, that puts the average dilution right around 20%, which isn''t surprising. Dilution. then you need to take a look at the dilution numbers. Dilution is the price and you''re all pretty much getting the same deal. If you''re oversubscribed, but don''t want to take additional dilution, you can usually move the price up. But what really counts is the dilution. Dilution.

The Top 10 Reasons Why Startups Fail

Business Plan Blog

Fear of Dilution. Understand the difference between dilution and economic dilution, which occurs when the value of the business doesn’t change but the number of shares increases. Steve Rowles has been serving the San Diego startup ecosystem for over 20 years.

Why you should raise more than you need

The Next Web

We were worried about dilution and thought we had more than enough money to grow. When we went out and raised the first time (four years ago), we hit our fundraising goal. We had additional investor interest and almost closed the round.

7 Ways College Degrees Can Expedite Startup Success

Startup Professionals Musings

A popular myth these days is that finishing college only dilutes your entrepreneurial instincts, and the best of the best, including Bill Gates, Steve Jobs and Mark Zuckerberg, dropped out early to hasten their success.

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Valuations 101: The Venture Capital Method

Gust

in the case of one investment round, no subsequent investment and therefore no dilution). I have seen some complex methods for accommodating anticipated dilution, but here is an easy way to adjust the pre-money valuation of the current round. Reduce the pre-money valuation (above) by the estimated level of dilution from later investors. If only 30% dilution is anticipated, reduce the pre-money valuation of this round by 30% to about $1.1

Take advantage of the good times to build stakeholder loyalty.

Berkonomics

I have seen investors allow a company to die, rather than suffer the massive dilution of an offer by a new investor. Loyalty is a hard-earned commodity. There are several times when stakeholder loyalty is tested to the limit.

The Harsh Reality Of The Preference Stack

Haystack

For early investors in companies… the notes you’ve converted into shares and the equity you own in startups that breakout and raise lots of money will not only likely get diluted (very few early-stage funds can defend their positions over time or grab enough ownership upfront to withstand the dilution) but also will likely get demoted on the preference stack.

Fewer words, greater effect.

Berkonomics

But he dilutes his effectiveness with wordy PowerPoint presentations. I have a good business friend, an experienced manager and teacher with a Harvard MBA, whose deep thinking creativity and intelligence are admired by many. It has become a long running joke between us, as I often remind him that most of us have a very limited attention span and ability to recall important points from a presentation. Note the title and tone of these insights. Short, to the point.

Avoid the race to zero…

Berkonomics

Email readers, continue here…] For young companies, often the question is whether to suffer a new round of dilution to stimulate growth, or to sell earlier and not share the (presumably) increased proceeds with additional investors. When do you sell your company?

8 Questions to Help Decide if You Should be Raising Money Now

Both Sides of the Table

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).

So, what if you run out of money?

Berkonomics

For early stage businesses worrying over dilution when faced with an offer of more money than they need, the professional advice is most often to take the money and suffer the dilution because the money may not be available if needed later. Money in the bank is like oil in the car.

How much capital should you raise?

Version One Ventures

Raise too much and you’re diluting your ownership; raise too little and your company will have trouble gaining traction or making it to the next month. Target between 15-25% dilution per round I typically recommend that founders put more emphasis on the quality of investors (i.e.

7 Investor Term Sheet Demands Startups Need Not Fear

Startup Professionals Musings

What they worry about is a whole different set of issues, including how much control they will have over how their money is spent, what will happen when future investors jump in to dilute their position and how they will get some money back if things don’t go according to plan.

How would you like a great advisory board?

Berkonomics

Have you ever thought of creating an advisory board? As you can guess, that would be an informal group with no legal responsibilities, but one able to be called upon to act as business, industry and scientific advisors to you and the company.

How to Keep Your Job As Your Company Grows

Steve Blank

Unless you have them capture the unique aspects of the culture, it will become diluted and disappear among the new hires. I know a change is going to come. If you’re an early employee at a startup, one day you will wake up to find that what you worked on 24/7 for the last year is no longer the most important thing – you’re no longer the most important employee, and process, meetings, paperwork and managers and bosses have shown up.

Several more real costs of taking outsider investments.

Berkonomics

Close. Let’s talk about the reality of taking money from professional investors. It is not the first time we’ve covered this general subject nor the last. But this time, we concentrate upon governance changes.

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ReBlog (kind of like retweet) – Insider Rounds

ithacaVC

Jason Mendelson just blogged about a new academic paper that seeks to destroy the myth that venture capitalists use inside rounds to dilute founders by issuing themselves cheap stock. The full paper is here. Dealing with VCs

Can Your Business Survive The Traditional Life Cycle?

Startup Professionals Musings

A common practice is to hire local employees who know the geographic culture, even though this may well dilute the company culture. This usually marks the end of organic growth, as partnerships and alliances aid growth, but again dilute the focus on culture.

How Much Should You Raise in Your VC Round? And What is a VC Looking at in Your Model?

Both Sides of the Table

Of course there are times where 15% dilution is more appropriate and other times it can be 33% but in a first meeting we’re just trying to establish general ranges for reasonableness.

8 Ways To Maximize The Value Of Your Startup Stock

Startup Professionals Musings

This is called stock dilution control. This allows the entrepreneur more influence in controlling dilution of his or her shares, investment terms and acquisition decisions.

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Equity for Early Employees in Early Stage Startups

SoCal CTO

The reality is that an early employee in a pre-funded startup that eventually raises a few rounds of capital will be diluted significantly, is down the line in preference, and will likely be locked up for a while to harvest it.

How to Raise Investor Funding for Your Startup

Early Growth Financial Services

Valuation — Know what these terms mean: Fully-diluted — This includes all issued stock and anything that could be converted into common stock (typically after an acquisition or IPO), such as your stock option pool.

How to Keep Your Business From Running Your Life

Startup Professionals Musings

Also you need to make sure that highly skilled key people are not diluted by unfulfilling routine work. Every entrepreneur I meet in my role as a small business advisor dreams of making the business run like clockwork, even without them.