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Dilution

blog.ycombinator.com

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Re: Dilution

#91

Post by bartmancuso »

antidilution wrote: post #77

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 g…

That seems reasonable if you can find Seed investors willing to sell. The very fact that the new investor wants to put money in at a favorable valuation may be the type of thing that makes the seed investor think "this company might be getting hot" and decide they don't want to sell.

Re: Dilution

#92

Post by drewrv »

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?

Lighter Capital will give growth capital to tech companies without expecting 10x returns or taking any equity.

Re: Dilution

#93

Post by tbrowbdidnso »

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…

I will never take startup advice from investors. They care about your company and their money, not you.

Of course they're going to tell you not to worry about giving more of the company away, they don't care who owns it. More money flying around is almost invariably a good thing for early investors.

You don't really need advice about funding from anyone, just look at some successful companies and see what they did. Funding is one of the few aspects where you can mimic your startup idols because it's public info.

The fact is, all the biggest unicorns had enough promise and brains behind them to retain majority ownership, or at least full control well into billion dollar territory. If you're good enough investors will be practically begging to give you their money.

Yeah, so fuck the advice from investors. Make sure you keep as much ownership and control over your company as possible until it's sending people to the moon.

Re: Dilution

#94

Post by karthikb »

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…

Unless you are independently wealthy or building something that can truly be bootstrapped (no expensive R&D, for example), investors are a necessary constant.

Re: Dilution

#95

Post by codingdave »

CalChris wrote: post #84
codingdave wrote: post #82

Earlier quoted context omitted.

> 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.

I'm not sure why you think they are different things. Without control, you cannot direct the company towards an exit. Or away from a bad exit. Or away from another deal that will further dilute your stake. You have to trust the majority holders to do all those things.

Maybe I've just been around for too many decades, and seen too many shady deals proposed. But my trust comes slowly -- control issues come first in my mind.

Re: Dilution

#96

Post by lpolovets »

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?

To be completely honest, I don't really view things from that frame. I think more about 1) how much does this company need to execute on their plans? and 2) what would a fair valuation be given their current progress and market comps? If that's 10% dilution then that's fine. If that's 25-30% dilution that's also fine -- but more dilution would be scary. Usually it's 20-25% dilution -- e.g. a fair pre-valuation might be $6m, and the company wants to raise $1.5m or $2m for 18 months to do X, Y, and Z.

If the valuation feels unreasonably high then I'll try to negotiate, or I'll just pass. If the valuation is low and results in too much dilution, then I'll try to figure out with the founder if they can make progress with less money/dilution, or I'll just pass -- because overdiluting sucks for the founder and will also eventually suck for me as an investor by capping the upside.

I think this framing works for the founder, too: if you need $X for your near term plans, and you're getting a fair valuation that doesn't overdilute you, then that's good. If the valuation is unfairly low, try to find other options. If it's unreasonably high, then that's okay if you are good with cash management -- but be mindful that the higher your current valuation, the higher investors' expectations will be for your next round.

Re: Dilution

#97

Post by lpolovets »

new2 wrote: post #64
lpolovets wrote: post #48

Earlier quoted context omitted.

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!

This free report is an excellent resource on average dilution at each round: https://www.capshare.com/blog/dilution-101-startup-guide-equ...

Re: Dilution

#98

Post by Brushfire »

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…

(Hey Leo)

I agree, this is hard to do. Because most investors triangulate on 15-25% per round, and use the amount of money you expect to raise as a way to back into a valuation.

As a founder, the best way to do this in a seed round would be to raise (all or most of) your seed round from Angels, who are more likely to sign off on a note / safe at a specific cap without knowing the total amount raised, and then you can triangulate on 10%.

It's worth noting that this game is even harder outside of the valley, because while operating costs are significantly lower, so are valuations, and most companies will bump into minimum cash needs for 12-18 months.

Sam made a good point: running out of money is way worse than optimizing for your cap table.

Let me make a second point: Optimizing for success is way more important than optimizing your cap table. In other words: If you believe a specific investor meaningfully adds to the probability of a success state for your company, then its probably a good bet even if you are not happy about the dilution.

In order of what you should care about:

1. Not running out of money.

2. Finding people who can be value-add and help you prevent mistakes and find success.

...

3. Dilution (within reason).

Also, you can always recap founders in later stages. It happens.

Re: Dilution

#99

Post by grosbisou »

jmspring wrote: post #49

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.

Could you link to some resources to help understand this kind of stuff? It's hard to navigate between all the numbers people at startup throw like it's always good things.

For example in your case why was it bullshit? It sounds like you potentially own less but it got more expensive.

Re: Dilution

#100

Post by aanm1988 »

idiot_stick wrote: post #9
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

> Employees are the ones who put in the work to actually build the company. Company and work that, in most cases, wouldn't exist without a capital investment.

You can bootstrap a company without VC investment. Good luck trying to build anything without hiring some people.
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