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Dilution

blog.ycombinator.com

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Re: Dilution

#21

Post by achou »

"How do I spend this money?"

If you're asking yourself this question, you're not focusing on building your business. How to spend it becomes a distraction.

The converse also happens: for any business problem the easiest solution is to spend money. Leads? Leadgen firm. Hiring? Recruiters. Code? Outsource, or contract out. Testing? you get the picture.

Throwing money at a problem is a short term fix but fails to build competence at doing that thing. The lack of experience weakens your company in the long term. It's organizational muscle that didn't get exercised. It atrophies over time.

This might make sense for certain areas, but having too much money on hand makes it very tempting to solve all problems with this one hammer.

Re: Dilution

#22

Post by Retric »

jimmykennedy wrote: post #5
anandkulkarni wrote: post #3

Earlier quoted context omitted.

In the final calculation, employees are the ones who are toiling day-in and day-out for the company's well being – in a real way, the company's future depends on them more than the investors. It can be more valuable to have them invested long-term in the company's success, point for point, than an investor. Another way to think about it is like this: if an investor told you tomorrow they'd no longer contribute to the…

"It's more valuable to have them invested long-term in the company's success." Why? A cash bonus of "If we meet this deadline you will receive $X" is going to increase my productivity much more than "you own 0.01% of an illiquid, unprofitable company". Startup equity is way too abstract for employees to affect their motivation. Peer pressure, mission, pride in work, cash bonuses / raises / promotions are infinitely m…

It's not about having equity now.

If you have a seed company that fails in two years then the equity equation is meaningless. However, if in two years things are going good, but it's not clear you are the next google then you really don't want to lose key employees and it's going to take more equity to keep them interested. On the other hand if in two years it looks like you will be the next google then getting more capital is easy and you really don't want to lose a key person.

Re: Dilution

#23

Post by maxxxxx »

100k wrote: post #20
kinkrtyavimoodh wrote: post #18

Earlier quoted context omitted.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

Sadly, four years of "heroic effort at failing startup" doesn't look as good on the resume as "worked at Google".

A lot of startups aren't even technically very advanced so the only thing you may have learned is to work 80 hours per week without complaining

Re: Dilution

#24

Post by edblarney »

maxxxxx wrote: post #14
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

"Investors just lose money but employees lose years "

Comparative value.

Most employees are fairly well paid, and don't 'lose years' unless they are working for free, or 'very cheap' which usually isn't the case.

Re: Dilution

#25

Post by blazespin »

I think something needs to be said about context. Some ventures will be more successful by raising more / diluting more, while others the cash will just hurt. Some examples: hardware plays versus an AI startup.

Re: Dilution

#26

Post by matchagaucho »

In every VC pitch I've made in the past 5 years, they have all offered more money than needed/requested.

Maybe I over-corrected by choosing to bootstrap, but you can never own too much of your own company.

In the VC's defense, their funds are increasing at a rate disproportionate to the number of partners available to manage the investments.

VCs simply cannot focus on 100 $1M investments with 5 partners.

Re: Dilution

#27

Post by sharkweek »

100k wrote: post #20
kinkrtyavimoodh wrote: post #18

Earlier quoted context omitted.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

Sadly, four years of "heroic effort at failing startup" doesn't look as good on the resume as "worked at Google".

Disagree - not saying that a failed startup is better than Google, but honestly there is a lot of appeal to hiring someone who took a shot on something less established. Both have their merits.

Re: Dilution

#28

Post by lpolovets »

Caveat: I'm a seed stage VC, so obviously I have a horse in this race.

I don't agree with this advice. Well, in theory, I strongly agree that avoiding excessive dilution is ideal. But the suggested numbers (10% dilution for a seed round) feel very unrealistic to me. It's very hard to get far on that kind of money for a seed stage company. If anything, the proliferation of bridge rounds and seed extensions and series of convertible notes show that even after raising seed rounds, many companies need more capital to get to a series A.

It's also interesting to note that the 10% figure is coming from YC, which takes 7%. That's a considerable amount of dilution, too (and very worth it, IMO).

Finally, I've never been a founder, but I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder. So the dilution seems less important than having enough capital for a successful outcome. I'd rather have 60% of a small exit than 80% of a $0 exit.

I do believe in constraints and good cash management, so regardless of how much founders raise, they should be conservative with spend until they have strong product market fit.

Re: Dilution

#29

Post by bbcbasic »

pdog wrote: post #2

> Most founders' instincts seem to be to give too much equity to investors and not enough to employees. Is this wrong? Investors don't receive anything for their capital but equity. Employees receive income, benefits, etc. that have to be factored into the equation.

My understanding is that employees will be paid less than what they could earn elsewhere, so need to be compensated with some upside for that shortfall.

If I were to cut your pay by $100k to join my company, would you say, ah OK but I am still receiving income & benefits, don't worry about it?

If you have to leave your 9-5 to work for my 10-"late" for the same salary, would you want something extra for that, even if it is just a high-EV lotto ticket?

Another argument, made in the article is that if you want to attract the best talent you need to make an attractive offer.

Otherwise why wouldn't the people you want just go work for Google or another startup, or start their own?

Re: Dilution

#30

Post by k__ »

birken wrote: post #7

> Remember that raising money is not success. Raising huge amounts of money early on is very rarely how companies win (though it is sometimes how companies lose) I honestly think one of the reasons the company I worked for was successful was our inability to raise money while we were young, which forced a real discipline and creativity for how to do more with less. It also made us skeptical of investors and ensured w…

Yes, I don't understand the whole investor hype.

I mean, I do contract work with startups and get paid with investor money all the time, so it's good for me.

But I think most investors are a liability.

First you have to make your employees and your customers happy and now you also have to make investors happy? How shoult this be a good thing?

It's hard enough to build products for users I can't directly interact with, why should this equation get another variable :\

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