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Dilution

blog.ycombinator.com

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Re: Dilution

#81

Post by nostrademons »

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.

Historically, when this has happened, it's because the founders have managed to build the product & get on the growth trajectory before taking investment. Bill Gates built Altair Basic, sold it to hobbyists, and reinvested the profits to buy MS-DOS and sell it to IBM. Larry & Sergey had a working search engine that was using up half of Stanford's bandwidth before they took their first angel investment. Facebook was a dorm-room project. SnapChat was a final project for a Stanford product-design course and had 100k users before it took investment. The Apple 1 was done in Steve Wozniak's nights & weekends, and had sold out before they took investment for the Apple 2.

If you have a working product and ideally money coming in, the early negotiation leverage changes dramatically. You can skip the seed round entirely, because you've already seeded the project. You can usually get a very good valuation on Series A, since your metrics look great and every VC wants a piece of you. You can negotiate to give away very low equity stakes in later rounds, since at that point you seem like a sure thing.

The flip side is that most side projects don't go anywhere. You need to be both very dedicated and very lucky to strike it big without investment.

Re: Dilution

#82

Post by codingdave »

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'd rather have 60% of a small exit than 80% of a $0 exit.

60% is one funding deal away from becoming a minority stake, while 80% leaves room to do another deal while still maintaining control. Money is not the only concern here.

Re: Dilution

#83

Post by Quanticles »

less dilution = good

money to do stuff = good

wise spending = good

these are all known things, i'm not sure this article actually digs much into how to balance them

Re: Dilution

#84

Post by CalChris »

codingdave wrote: post #82
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'd rather have 60% of a small exit than 80% of a $0 exit. 60% is one funding deal away from becoming a minority stake, while 80% leaves room to do another deal while still maintaining control. Money is not the only concern here.

But he's talking about exit and not control after another round.

Re: Dilution

#85

Post by jkarneges »

amorphid wrote: post #68
jkarneges wrote: post #63

Earlier quoted context omitted.

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.

I wouldn't preallocate for investors. It's too unpredictable. Employees, sure.

Is it that you want to be able to say to your team members, "you have X% in the worst case" ? I don't think it's practical to make such a statement if you're going down a fundraising path. At best you might be able give a near term worst case, based on the next round or two (e.g. apply the high side of Sam's seed/A dilution ranges). It's all guesswork though, and even with a preallocation you might need to exceed it.

Re: Dilution

#86

Post by aianus »

lpolovets wrote: post #61
ryandrake wrote: post #58

Earlier quoted context omitted.

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…

I don't understand 3)

From the VC's point of view how is a 5% chance of a $200m exit different from a 1% chance of a $1b exit? (etc.)

Re: Dilution

#87

Post by [deleted] »

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?

[deleted]

Re: Dilution

#88

Post by SFJulie »

As a former serial startup employee (I used to be young an optimistic) I cannot count the money I earned doing crunch and being underpaid ...

Because I have none of it.

Re: Dilution

#89

Post by bytecodes »

crdb wrote: post #79
lpolovets wrote: post #43

Earlier quoted context omitted.

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?

If you've found the next Uber, that's exactly when it matters.

Re: Dilution

#90

Post by god_bless_texas »

Abundnce10 wrote: post #66

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. Ar…

I would love to see that along with the founder and early employee stakes broken down on the company side. This is all so easy when you read it on various websites and haven't actually done it on your own. Then you get in the driver seat and there's all this crap flying at you that doesn't fall into any one bucket. The guy who is critical to your business doesn't care how much equity he gets. The gal who is not as critical is ready for a cage match. The investor wanting to throw you 5 million makes the offer over a burger and a beer. The guy in the next town over wants pages of documentation for his $20,000.
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