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Dilution

blog.ycombinator.com

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Re: Dilution

#71

Post by jacquesm »

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 are conflating ownership and the role of a CEO. Technically the CEO does not have to hold equity at all (and this is in fact common in many older family owned companies).

Decision paralysis is more a function of not having a clear path forward or having founders without aligned goals than anything else and those are serious problems that need to be dealt with but they do not need to be dealt with on an equity level.

It's much more to do with knowing which role fits you best.

Keep in mind that the CEO functions at the pleasure of the board if you have one and the stockholders if you do not and unless you plan on doing stuff that will go directly against the interest of other shareholders having control is rarely if ever important.

Far more important than the CEO having a controlling percentage of the equity is that the founders have a controlling percentage (and if possible, a supermajority depending on your articles of incorporation and shareholder agreements and whether or not you have more than one class of stock).

Re: Dilution

#72

Post by nostrademons »

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?

Sad, yes, but that's the world we live in. There's really no such thing as a "safe, modest bet" - that lifestyle business that provides you a good living now will cease to provide you a good living soon after a big competitor decides to move into your space. Similarly, even working for the big competitor isn't all that safe: you could be laid off because your manager doesn't like you, or because your manager's manager doesn't like your manager, or because product priorities shifted around, or because you're suddenly the scapegoat for your company's sexual harassment culture, or because your company hit a revenue speedbump, or simply because shareholders & upper management get greedy.

Binary success ultimately comes from the customer: from their perspective, either the product satisfies their need or it doesn't. As soon as some other product satisfies their need better, they'll switch. And since customers talk to one another and largely like the same things, they tend to do so en-masse, and even $multi-billion giants can find their market evaporates in the span of a couple years.

Re: Dilution

#73

Post by Kiro »

> raise $5 million on a $10 million pre-money valuation (selling 33% of the company to investors)

How do these calculations work?

Re: Dilution

#74

Post by gmarx »

matchagaucho wrote: post #26

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.

Do I understand correctly that every time you have pitched VCs in the past 5 years they wanted to give you money? If pitched to many VCs over the years and never been offered investment. The rest of you make it sound so easy

Re: Dilution

#75

Post by tyre »

Kiro wrote: post #73

> raise $5 million on a $10 million pre-money valuation (selling 33% of the company to investors) How do these calculations work?

The pre-money valuation is what you are worth before the investment. So you're saying "we have a company worth $10 million" and the investor is saying "cool, let me give you $5 million."

So now you have $10 million in company plus $5 million in cash, so you are worth $15 million (that's called the post-money valuation.) The investor gets $5m / $15m—33% of the company.

Re: Dilution

#76

Post by tyre »

gmarx wrote: post #74
matchagaucho wrote: post #26

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.

Do I understand correctly that every time you have pitched VCs in the past 5 years they wanted to give you money? If pitched to many VCs over the years and never been offered investment. The rest of you make it sound so easy

There is a 100% chance that they did not get money/term sheets from 100% of VCs that they pitched.

Don't feel bad, raising money is really fucking hard, stressful, random, and involves a lot of luck.

Re: Dilution

#77

Post by antidilution »

Serious question here for people who know about this.

"I have recently seen several examples of companies doing pretty well and going out to raise B rounds with investors already owning 50-60% of the company. In all cases, they are having a tough time."

I know a company in this position. Not quite going out to raise a Series B, but lots of interest from current Series A investors in doubling down (doing an internal growth round).

What's special about this scenario is that the company is profitable and has millions in revenue and grew 1,200% since the Series A investment round just a couple years ago. But because the pre-Series-A financing was at depressed valuations, there is only 30% of stock for the common, and the founders/employees are (rightfully) worried about dilution. The cap table is clean, but the distribution is unfavorable.

In this case, could founders make a reasonable argument that Series A investors should buy out seed investors and angels rather than diluting the common stock holders further? It seems like secondary liquidity for the angels would be attractive to them, and I heard that when offering secondary liquidity for those seed-stage investors, one could do some sort of "stock-cash swap" that avoids dilution of the common. Anyone heard of something like this or have good reading material about it? It seems like an esoteric "third way" between Series A and exit.

Re: Dilution

#78

Post by sja »

Kiro wrote: post #73

> raise $5 million on a $10 million pre-money valuation (selling 33% of the company to investors) How do these calculations work?

Worth of company before investor gives company cash (pre-money valuation): $10 million

Worth of company after adding $5 million from investor: $15 million.

Investor now owns $5 million dollars "worth" of a now $15 million company

$5 / $15 = ~33%

Re: Dilution

#79

Post by crdb »

lpolovets wrote: post #43
coffeemug wrote: post #40

Earlier quoted context omitted.

> 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."

What is your response to that argument?

Re: Dilution

#80

Post by matchagaucho »

gmarx wrote: post #74
matchagaucho wrote: post #26

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.

Do I understand correctly that every time you have pitched VCs in the past 5 years they wanted to give you money? If pitched to many VCs over the years and never been offered investment. The rest of you make it sound so easy

Sorry, didn't mean to trivialize the process.

More literally, for the all VC conversations that got past due diligence, the negotiations simply fizzled out.

Dilution was only one of many factors. It is a very hard and grueling process.

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