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.

Trending Sources

Dilution concerns by founders and investors

Taffy Williams

Investors and co-workers in your startup often express dilution concerns. This piece further addresses the issue of dilution as a result of an excellent question from a reader commenting on a recent article covering the summary of a conference.

Maker's Mark Dabbles in Diluting Its Brand

Inc Startups

In fact, the distillery has seen an increasingly difficult time in keeping up with expanding sales. As COO Rob Samuels told BourbonBlog.com, sales of Maker's Mark have grown between 8 percent and 9 percent a year, owing to a boom in domestic bourbon interest and growth of international demand.

18 Scarcity Examples That Can Boost Sales

ConversionXL

The problem is, if you don’t do it right, it’s pretty meaningless (or worse, you trigger a psychological backfiring and hurt sales). Studies of retail sales have shown that if more than about 30% of goods have ‘sale’ sticker on them, the effectiveness of this method decreases.”.

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Stick to What You Know: How Branching Out Can Hurt Your Business

Up and Running

Don’t Dilute Your Brand. Case in point: did you know that without even being aware of it, you can unintentionally weaken and dilute your brand? Of course, Virgin is still around and kicking; they are simply too large to be ruined by this sort of brand dilution. Business Management Lean Planning Sales and Marketing branding dont branch your business effective branding effective marketing

4 Chasms And 5 Customer Types That Kill Entrepreneurs

Startup Professionals Musings

It takes focus to resist adding a long list of features that seem to make the opportunity larger, but dilute to focus of both you and potential customers. Marketing and sales chasm. Everyone in the business world has heard of the old bestseller by Geoffrey A.

The Resetting of the Startup Industry

Both Sides of the Table

But I would point out that raising money is an existential event and I think in the coming 12-18 months you may see loss ratios (companies going out of business or selling in fire sales) go up. Optimize for a W more than % dilution in these circumstances.

Valuations 101: The Venture Capital Method

Gust

in the case of one investment round, no subsequent investment and therefore no dilution). The selling price can be estimated by establishing a reasonable expectation for revenues in the year of the sale and, based on those revenues, estimating earnings in the year of the sale from industry-specific statistics. 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.

Should You Sell on Etsy, or Build Your Own E-commerce Site?

Up and Running

As long as you’re not spreading your energy too thin or diluting your traffic, the more exposure you can get, the better. Build your site around sales and marketing. Give every product on your site an alluring and keyword-rich description, for both sales and SEO purposes.

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Should Startups Care About Profitability?

Both Sides of the Table

The most obvious way to explain this is with sales people. If you hire 6 senior sales reps in January at $120,000 / year salary then you’ve taken on an extra $60,000 per month in costs yet these sales people might not close new business 6 months.

Stick to What You Know: How Branching Our Can Hurt Your Business

Up and Running

Don’t Dilute Your Brand. Case in point: did you know that without even being aware of it, you can unintentionally weaken and dilute your brand? Of course, Virgin is still around and kicking; they are simply too large to be ruined by this sort of brand dilution. Business Management Lean Planning Sales and Marketing branding dont branch your business effective branding effective marketing

8 Ways To Maximize The Value Of Your Startup Stock

Startup Professionals Musings

Make sure the government waits for a stock sale to collect taxes. 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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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.

Anatomy of a Term Sheet: Right of First Refusal, Right of Co-Sale and Lock-Up

VC Ready Blog

While the Investor Rights Agreement deals with the rights of the investors vis-à-vis the company, the Right of First Refusal and Co-Sale Agreement gives the company and the investors certain rights vis-à-vis the company’s common stockholders. The Lock-up applies to sales by the common stockholders following the company’s initial public offering. Right of Co-Sale. NOTE: This is the fourteenth post in our series about standard terms in early stage equity financings.

Deciding How Much Equity to Give - How Much is Less Important Than What It's Worth!

Small Business Force

It is also less understood than it should be, with dilution and control issues being major points of concern. The point of it was that with any kind of equity distribution, dilution will always occur. Have you worried about or even turned away investment because of fear of dilution?

Smart Entrepreneurs Build Startups Without Investors

Startup Professionals Musings

Don’t let early funding increase risk and dilute your potential. Thus they will insist on a sale or public offering at every opportunity, which will likely force you out.

One of the Biggest Mistakes Enterprise Startups Make

Both Sides of the Table

The era of VCs investing in successful consumer Internet startups such as eBay led to a belief system that seemed to permeate many enterprise software startups that hiring sales or implementation people was a bad thing. These are the lifeblood of your sales organization.

Happy Birthday HubSpot! 9 Lessons From Our First 9 Years

OnStartups

Don't minimize dilution, maximize impact. If you go out and raise outside funding, resist the temptation to worry too much about valuation (and minimizing dilution). In the grand scheme of things, as long as you're getting a fair deal, marginal differences in dilution won't matter.

One (round) and Done

Bryce Dot VC

And not just a token “ramen” level of profitability: The startup is profitable, with January revenue of 10x its burn rate and sales expected to be in the millions for the quarter. And it rewards that early, and often painful, focus on revenue and sustainability with less dilution and more optionality. Just as we’re running out of derivatives for “seed” and letters in the alphabet there’s a new funding trend emerging.

How to Configure Your Startup Team

Both Sides of the Table

it’s the most expensive dilution you’ll ever face. Your first sales people should be consultative sellers who can fuel evangelical sales. Don’t hire “relationship management” sales people too early.

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.

Why Entrepreneurs Need To Keep Their Business Focused

Startup Professionals Musings

Every new business or product owner wants to attract the broadest possible audience, so they are prone to adding more features, multiple sales channels, and appealing to every demographic.

Too Many Bells and Whistles Will Not Sell a Product

Startup Professionals Musings

Avoid adding features for a single customer to close a sale. Features added which have not been evaluated to have general appeal make your product more difficult to support, dilute your development effort for important features and complicate the usability and installability for all customers.

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How to Avoid Taking “Dumb Money” in Your Startup

Up and Running

Is the investor asking for a non-dilution clause (a stipulation that their equity shares never dilute) in your operating agreement? (No Every time an investment is made, everyone dilutes!).

Valuation vs Ownership

A VC : Venture Capital and Technology

The entrepreneur suffers the same dilution but gets $3mm more to work with. The first deal would produce $20mm in proceeds at sale, an $18mm gain, and a $3.6mm carry if you charge 20% as we do at USV. And at the time of the sale to Yahoo!, I am talking at the PreMoney conference today (via Skype) and I woke up thinking about the challenges facing the VC industry. I hope to talk a bit about this at the conference. Some investors are ownership focused.

Why Companies Fail

Seth Levine's VC Adventure

A company gets some early data on sales performance and either completely misinterprets it or believes that early sales scales linearly (or even worse, on a log basis). Not recognizing that your sales problem is actually a product problem.

How To Segment Your Subscribers When You Run A Blog Business

Entrepreneurs-Journey.com by Yaro Starak

In my case, and very likely your case too, we want to segment our readers so we can achieve the following goals - Make money , often from promotional content (affiliate links and your own products) Do so without alienating your audience The challenge is always how to find a way to commercialize a blog without diluting the value of the reason people come to the blog in the first place.

Why You Need to Ring the Freaking Cash Register

Both Sides of the Table

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.

10 Tough Quandaries That Lead Entrepreneurs Astray

Startup Professionals Musings

The downside is loss of control and financial dilution. If you take investor money, expect a push for hockey-stick growth and a liquidity event, like going public (IPO) or sale (M&A), to get the payback.

Founder’s Stock Is Gold, If You Know The Rules

Startup Professionals Musings

Stock dilution control. Everyone wants to minimize dilution of shares, so this special clause is common.

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What Is Venture Debt and How Should Startups Use It?

View from Seed

In many instances, you raise an institutional round to either fulfill a product strategy or go-to-market strategy or you’re increasing sales and marketing hires, so you have better visibility into what needs to happen in the next six, 12, 18 months. NVV: Is there any dilution?

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Value Inflection Points for Seed-Stage Startups

View from Seed

Similarly, proving sales friction can sometimes be done with very little actual product built. That’s when it’s important to raise more money sooner, even at the risk of more significant dilution from the start.

Five Pitfalls of Seed Round Hiring

This is going to be BIG.

Just like in sales, if you don't put in lead generation tools for talent as early as possible, and start tracking it, that well is going to run dry very quickly. Maybe you should raise a little more money, take a little more dilution, and get out there with fair offers to the people you've identified as the people most able to make your disproportionate ownership of the company worth millions (especially since their share isn't likely to be worth millions).

How Valuable Are Stock Options Offered By A Startup?

Startup Professionals Musings

CEO brought in to replace the founder, 5 - 10% CTO, CFO, VP of Marketing or Sales, 1.5 - 3% Chief Engineer or Architect, 1 - 1.5% Wouldn’t you like to be one of the lucky people who joined Google and Facebook when these were startups, and now be a multi-millionaire?

7 Keys To Making A Micro-Business Your Success Path

Startup Professionals Musings

These are usually characterized as owner-operated, with five employees or less, and less than $250,000 in sales. If you can do one thing well, don't dilute your efforts until you have been turning a large profit over a consistent stretch of time.

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

Both Sides of the Table

A year ago I blogged about one of my most common mantras that applies to sales, biz dev & fund raising alike: “ Time is the Enemy of all Deals.&#. How much dilution am I going to have to take now? So if you can take 27% dilution for $1.5 25% dilution).

The Truth About Convertible Debt at Startups and The Hidden Terms You Didn’t Understand

Both Sides of the Table

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. What happens in a sale or acqui-hire?

10 Branding Elements And What They Mean

Brandanew

Its existing premium customers won’t take it kindly as it dilutes the said image. So, it is not only the sales but the sheer image that takes the equity to a different level altogether. Branding is complex topic.

How To Stretch Your Comfort Zone For Business Success

Startup Professionals Musings

Lack of focus only confuses customers and dilutes your scarce time and resources. If your comfort zone is relying on gut reactions, it’s time to stretch your understanding of what constitutes customer acquisition cost, margins, pipeline closure rates, and sales ROI.