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Dilution

blog.ycombinator.com

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Re: Dilution

#41

Post by yosefk »

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…

Counterpoint: if you're running out of money, the next investor you try to raise from is going to be tough to negotiate with. If you have years of runway left, you're in control when talking to investors, when you have 6 months, they're in control. Another point is that when everything comes down crashing, as it did in 2008, and you can't raise money anywhere nor, in many cases, make a profit in the near future since demand for everything also crashes, then if you've squirreled away enough money, you don't have to fire anyone, nor close shop.

This is not to say that too much money can't cause the problems you mentioned. The cure is to keep the money in the bank and not spend it.

All of the above is what my employer did, not my own personal idea. (Also no VCs, these gut the company if it's neither public nor profitable in 5 years, or at least they used to.)

Re: Dilution

#42

Post by 3pt14159 »

lpolovets wrote: post #28

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…

To me it's about the control more than it's about the money. If preferred shares got half the voting rights as common then the difference between a 10% seed and a 15% seed isn't as bad, but after accelerator / angel takes 7%, seed takes 15% and possible bridge + series A takes 30% you're down to raising a series B and admitting that you're no longer in control of the company.

Re: Dilution

#43

Post by lpolovets »

coffeemug wrote: post #40
lpolovets wrote: post #28

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…

> I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder As an ex-founder I never understood why people make this argument because it's completely symmetric. I.e. I could rephrase it as "I imagine if a company becomes enormous, I'd care less whether my outcome was $200m or $250m as a VC" I agree with the advice in the article but would phrase it slightly diff…

People do make that symmetric argument, actually :). A lot of people in the ecosystem, both founders and VCs, will say things like "investors shouldn't be price sensitive, because if you've found the next Uber, it doesn't matter if you get in at a $10m cap or a $15m cap."

Re: Dilution

#44

Post by austenallred »

lpolovets wrote: post #28

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…

My first reaction was "wow my company must have sucked." And granted on many levels we did (and were never close to being the hottest company in the world), but if I fought for 10% seed dilution I would have been laughed out of the room.

Maybe it's different if you're a shit-hot YC company, but man. I thought you were successful if you stayed below 20% at seed.

Re: Dilution

#45

Post by jacquesm »

softawre wrote: post #35
jacquesm wrote: post #17

Earlier quoted context omitted.

That's not true. You have the option to give that engineer a real slice of the cake instead of the misers share that's common. I've seen co-founders be labeled 'engineer #1' because they sat down 15 minutes after the first meeting where a company's founding was discussed. Non technical founders can - and do - use investors money to try to limit the number of co-founders so they get a larger share themselves. Technica…

> Technical founders are less likely to do this to non-technical co-founders. (But it does happen.) Technical people are so great, aren't they! No bias here.

It's not that they're 'so great' it's just that they are usually less business savvy and doing less 'jockeying for position'. They tend to not be in it for the money as much as they're in for the challenge which makes it relatively easy to take advantage of them. (Been there, done that, have several t-shirts to go with it and I promise it won't happen again but if I had known 20 years ago what I know now... never mind, hindsight is always perfect.)

Re: Dilution

#46

Post by marcofloriano »

yosefk wrote: post #41
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…

Counterpoint: if you're running out of money, the next investor you try to raise from is going to be tough to negotiate with. If you have years of runway left, you're in control when talking to investors, when you have 6 months, they're in control. Another point is that when everything comes down crashing, as it did in 2008, and you can't raise money anywhere nor, in many cases, make a profit in the near future since…

I like your idea (actually i practice it), but your investors aren't putting a lot of money in your hands so you keep it at the bank to them, right? They could do that for themselves.

By experience you don't need years on cash to survive in the long run, discipline and a business that makes sense is way more powerful.

But off course, months of runaway is necessary. More than that is luxury.

Re: Dilution

#47

Post by sydd »

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…

Agree, I saw a startup where I worked go down because of too much money.

They had a very good seed round and raised $2M. They used this to develop their first product, which did really well. After 2 years we had 50 employees and were breaking even, sometimes even a bit profitable, so we had even some extra in the bank. Obviously such numbers drove investors crazy, and they went to the highest amount they could raise without selling most of the company. So they raised about $20M.

After a few months our product (and our income) started to dwindle (competitors were upping up their game, different platforms became relevant,...), but the founders were very chill about it - I guess because we had enough cash in the bank to run the business for years without firing anyone. But after a year of so the investors started to panic - no wonder since our revenue numbers were in freefall. After another year or so the founders were forced to sell the company for small change compared to what it was valued at its peak.

Re: Dilution

#48

Post by lpolovets »

austenallred wrote: post #44
lpolovets wrote: post #28

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…

My first reaction was "wow my company must have sucked." And granted on many levels we did (and were never close to being the hottest company in the world), but if I fought for 10% seed dilution I would have been laughed out of the room. Maybe it's different if you're a shit-hot YC company, but man. I thought you were successful if you stayed below 20% at seed.

Yeah, my ballpark estimate from my portfolio (~50 investments in my fund + ~20 personal angel investments) is that 20-25% dilution is common at seed stage. Occasionally it's 15%, which is great. Occasionally you also see 30+%, and that's pretty bad.

Re: Dilution

#49

Post by jmspring »

A classic comment from the CEO of a startup I worked at during an all hands after a new round of funding, someone asked about dilution. The CEO (with a straight face) said, "you weren't diluted, the share price increased." The question was from one of the early employees. It was one more item that made a few of us who were already fed up about a few things leave before even vesting.

Re: Dilution

#50

Post by catshirt »

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".

i've had the opportunity to hire a decent number of people at a couple of startups. i hope you can find comfort in the fact i disagree with you. :)
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