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Dilution

blog.ycombinator.com

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Re: Dilution

#61

Post by lpolovets »

ryandrake wrote: post #58
tyre wrote: post #38

Earlier quoted context omitted.

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?

1) There are some new funds popping up, like indie.vc, which don't subscribe to the "Uber or bust" model. Some accelerators, like 500 Startups, are also in that camp.

2) If you can bootstrap to enough revenue, you can try bank loans or things like http://www.saas-capital.com/

3) Unfortunately, the numbers don't work out for VCs if your goal isn't "$1b+ or bust." Almost all companies will exit for much, much less than $1b, but if there's no chance of $1b+ then there's basically no chance that a company will product very meaningful returns for its investors.

Re: Dilution

#62

Post by oculusthrift »

jacquesm wrote: post #60
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.

From what I've read, from former ycombinator founders, that if one person isn't in charge then people get stuck in decision paralysis. And that for instance if three people are equal partners, its always a game of alliances and two people ganging up against the other one.

Re: Dilution

#63

Post by jkarneges »

amorphid wrote: post #54

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 empl…

I did something like this with our company, but it doesn't really do anything other than make round share counts. All that matters is the proportions between shareholders, not the number of unissued shares.

Re: Dilution

#64

Post by new2 »

lpolovets wrote: post #48
austenallred wrote: post #44

Earlier quoted context omitted.

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.

Would it possible to provide more granular data(anonymized, of course)? What was the mean, median etc dilution for your seed investments? And same for when your portfolio companies go on to raise a Series A? Thanks!

Re: Dilution

#65

Post by jartelt »

The other consideration with raising a large round is that you are going to have a high valuation. If your company is awesome and growing really fast, this is no problem. However, if you overestimated your market and struggle to grow into that high valuation, you limit your options for a successful exit.

Re: Dilution

#66

Post by Abundnce10 »

Somebody please make this: like TransparentStartup [1] but instead of sharing revenue numbers the startup shares their cap table so that we can see how it changes over time after multiple rounds of fundraising.

I feel like seeing concrete examples of how the founders' share of their company changes based on the size/details of a fundraising round would be super useful for founders as they negotiate funding rounds.

Are there any companies currently sharing these details that I'm not aware of?

[1] http://www.transparentstartups.com/

Re: Dilution

#67

Post by hbhakhra »

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.

That would only happen when you have a line of investors waiting to invest and you can dictate the terms because of your high growth trajectory. In most cases though, it's not going to happen because of the standard numbers outlined in the article.

Re: Dilution

#68

Post by amorphid »

jkarneges wrote: post #63
amorphid wrote: post #54

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 empl…

I did something like this with our company, but it doesn't really do anything other than make round share counts. All that matters is the proportions between shareholders, not the number of unissued shares.

Given what you know, would you do it again? My main thinking is that it's simply easier to reason about, especially when discussing the value of shares with non-investors.

Re: Dilution

#69

Post by tyre »

ryandrake wrote: post #58
tyre wrote: post #38

Earlier quoted context omitted.

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?

You don't have to do Uber or bust, but don't ask for venture money without going for venture returns.

I do agree that there is a market opportunity to fund $50m/year businesses, but that's not what VCs are for.

VCs: Invest in 100 companies, 90 fail, 5 return capital, 3 return 10x, 2 return 100x | 2.35x return on capital over a 10 year period (hopefully)

Index fund: 6% yearly return | 1.79x return on capital over 10 year period

Traditional small business loans average 6-9% APR and have a higher failure rate than an index fund but lower than an index fund. Unfortunately, for startups, they require collateral and/or historical financials.

Re: Dilution

#70

Post by jkarneges »

oculusthrift wrote: post #62
jacquesm wrote: post #60

Earlier quoted context omitted.

> 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.

From what I've read, from former ycombinator founders, that if one person isn't in charge then people get stuck in decision paralysis. And that for instance if three people are equal partners, its always a game of alliances and two people ganging up against the other one.

You do that by making one person the CEO. :)

If co-founders are ganging up against each other then that may not be a stable founding team.

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