Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Dilution

blog.ycombinator.com

Post reply on HN
Print view View original

51–60 of 126 posts

Re: Dilution

#51

Post by marcofloriano »

k__ wrote: post #30
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…

Maybe one thing lead to another. By making your customers and employees happy, you make your investors happy.

The money makes sense when you need to scale fast. Specially in the development stage, when you don't make a dime yet.

With the advance of the internet marketing, it's don't make much sense, as you put.

Investors should be moving their money from internet, i think, to AI, Space, Augmented reality and so on. They should fund stuff that is really risky. Turns up ... internet is not risky anymore.

Re: Dilution

#52

Post by yosefk »

marcofloriano wrote: post #46
yosefk wrote: post #41

Earlier quoted context omitted.

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.

Investors put money in the craziest places, surely there's a public story stock right now that you think is inflated beyond belief and yet it trades at the price it does. It follows that investors will do crazier things than give you money to keep in the bank if you persuade them.

You tell them point blank, "we're hoping to make it big this year, but we aren't taking any risks and we're gonna keep enough cash in the bank for the 3 next years. If you don't like this plan, fine, you're missing a chance to buy a stock that's gonna shoot up 10x and here's why", and they buy your pitch, they're gonna beg you to take their money.

I'm not saying I can do this, I'm saying people exist who can, and there are markets where things are measured in years, and so you might want more runway because your progress is way slower than that of a YC-backed Internet monopoly wannabe.

By the way, MIPS Technologies was killed by genius investors who said "give us your $100+ million in cash or invest it" and a genius CEO who said "fine, you ain't gettin' nothin', I'm buying Chip Idea." It turned out that they didn't know how to run Chip Idea and ran it into the ground, and now they had neither money in the bank nor anything to show for it. This drove the company value down so much that Imagination bought it for $60 million (the patents were sold to a big CPU cartel for another $500 million, perhaps unfortunately as genius investors did not get quite the punishment they needed to learn anything.)

A CEO capable of persuading the board of directors to keep the money in the bank would have done better.

Re: Dilution

#53

Post by oculusthrift »

Tangential question: How do founders typically retain control of their company? I've specifically been told that it's wise for one person to own 51pct of the company and be CEO. However, with 20 pct of equity for investors and 10 reserved for future employees, this doesn't seem to leave much for cofounders who are potentially putting as much skin in the game as the CEO.

Re: Dilution

#54

Post by amorphid »

Do startups ever pre-allocate blocks of equity for investors? I understand it's common to carve out N shares for employee options.

Say pre-raise look like this...

- 30% for founders

- 20% for employees

- 50% for future investors

Then when raising initial funds, you sell 20% the total pie (40% of the investor block) of the company to investors, making the share split look like this...

- 30% for founders

- 20% for employees

- 20% for current investors

- 30% for future investors

When an exit occurs, any unallocated shares get split up among the existing shareholders using whatever formula is used to calculate how the money is distributed.

Re: Dilution

#55

Post by edblarney »

Gibbon1 wrote: post #34
edblarney wrote: post #24

Earlier quoted context omitted.

"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.

How many two year sprints at 150% can you do during your career? One? Two? Three? Yeah you can totally do it again until you can't. Burnout is a real thing.

I've worked at a few startups, and with many more - and most of them did not require 150%. The two most successful were unicorns (networking, back in the day), and there we were barely past 100%. We worked mostly 9 to 5. Sometimes there was a push.

The extra bit past 100% is what you get equity for.

Moreover - it's definitely a choice on the part of the employee.

Software developers are generally in high demand, wages are high, and there's no reason to go '150%' unless you feel the 'total package' is right for you.

If service workers were required to put in 70 hours a week for 'no extra comp' then this would be a different story.

Re: Dilution

#56

Post by yosefk »

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…

One big problem with dilution isn't that you make less money but that you lose control of the company. And poor decisions by investors are a good contender for the #1 thing killing companies. For a VC this is yet another bet which they don't quite understand or care about, compared to a founder for whom it's the bet, and they understand it and care about it much more. Founders being in control is better than VCs being in control.

Re: Dilution

#57

Post by sama »

Bug fix: in an earlier version I used 12.5% and 20% as the rough targets for seed and A rounds. Then I decided to switch to 10-15% and 15-25% ranges. Somehow that change only partially got made, indicating 10% and 15-25%. Now it's fixed.

Re: Dilution

#58

Post by ryandrake »

tyre wrote: post #38
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 agree. Ironically, this was the advice we got while going through YC (yours, not Sam's.) Specifically: don't worry about valuation because success is binary. You either make enough money that you don't care too much about percentage or you make zero dollars in which case you don't care about percentage. The idea of constraints helping to focus a team sounds true, as long as people have enough to not worry about mon…

Does anyone else find this binary view of success to be... sad? I guess you could say that if your goal isn't "Uber or bust" then don't take external capital. Is there really no funding available for companies that just want to make relatively safe, modest bets and deliver relatively safe, modest returns?

Re: Dilution

#59

Post by logicallee »

I think it's a bit insensitive not to mention that at the seed stage most companies throughout the world cannot raise any money on any terms, period. (Literally: period.)

This includes companies with revenue and built product.

The rest of the advice is good and interesting - but it really is for companies that can raise in Silicon Valley.

Re: Dilution

#60

Post by jacquesm »

oculusthrift wrote: post #53

Tangential question: How do founders typically retain control of their company? I've specifically been told that it's wise for one person to own 51pct of the company and be CEO. However, with 20 pct of equity for investors and 10 reserved for future employees, this doesn't seem to leave much for cofounders who are potentially putting as much skin in the game as the CEO.

> I've specifically been told that it's wise for one person to own 51pct of the company and be CEO.

Well, if that CEO puts up 51% of the capital that might happen. But otherwise the better formula is to be equals as co-founders.

Post reply on HN