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

101–110 of 126 posts

Re: Dilution

#101

Post by tbrowbdidnso »

tyre wrote: post #69
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?

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 y…

I never understood this logic. Investors want unicorns but it's not like they're going to hate you for only giving them a 5x ROI.

Most startups either fail or become small businesses. Investors are giving you money to fund a business that you own. Depending on the terms you can, and should, use that money for whatever you want.

Its the investors problem if 5x returns aren't good enough, not yours. Does the bank call you to complain that your mortgage interest rate is too low? No. They gave you the loan with what they thought was reasonable terms at the time. It's not your fault they gave you the money too easily.

You should be focused 100% on building a successful sustainable business. Investors can fuck right off if they push for risks that could turn their 5x return into 0.

Re: Dilution

#102

Post by CalChris »

codingdave wrote: post #95
CalChris wrote: post #84

Earlier quoted context omitted.

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…

Well, they are literally different things and yeah, I'm caught up on that. I'm trying to figure this out too.

I've known of founders who wouldn't take a deal because they liked being, to use Zuckerberg's honorific, CEO, bitch. And then they rode that into the ground.

I think you're saying they're two forms of the same thing. That's true but they're not two reversible forms. Moreover, there is no control after exit.

So the point is that taking a little less at a concrete exit might be worth more than taking a little more of a sleigh ride.

Re: Dilution

#103

Post by auganov »

Diluting founders' equity is the least important point. A messed up cap table can make your startup uninvestable. It hurts the whole company, not just you, the founder. Which is why you mostly see these deals peddled by VCs without a track record.

Even if you can't get a different deal you might want to pass. There's just no point. Unless all you want is a salary.

Re: Dilution

#104

Post by nostrademons »

tbrowbdidnso wrote: post #101
tyre wrote: post #69

Earlier quoted context omitted.

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 y…

I never understood this logic. Investors want unicorns but it's not like they're going to hate you for only giving them a 5x ROI. Most startups either fail or become small businesses. Investors are giving you money to fund a business that you own. Depending on the terms you can, and should, use that money for whatever you want. Its the investors problem if 5x returns aren't good enough, not yours. Does the bank call…

That requires that you have board control. If investors control the board and you tell them to fuck right off, you will quickly find yourself out of a job.

Re: Dilution

#105

Post by snarf21 »

sydd wrote: post #47
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…

Agree, I saw a startup where I worked go down because of too much money. They had a very good seed round and raised $2M. They used this to develop their first product, which did really well. After 2 years we had 50 employees and were breaking even, sometimes even a bit profitable, so we had even some extra in the bank. Obviously such numbers drove investors crazy, and they went to the highest amount they could raise…

This is the part I don't understand and am going through now. You raise a ton and get good at spending or you raise minimum and constantly bridge every time growth doesn't match plan, buying time to catch up or tweak.

Why don't investors offer terms that have steps with growth KPIs (ones you can't spend your way to) that give you more money automatically if you make the metrics? As a company you don't have to constantly raise or bridge but you also can't go drop 5M on new offices. You have all the money and runaway you need as long as you hit the milestones. The investors still have all the same upside but less exposure.

I must be missing something I guess. It would solve issue we have at the startup I'm at now though.

Re: Dilution

#106

Post by lpolovets »

aianus wrote: post #86
lpolovets wrote: post #61

Earlier quoted context omitted.

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.)

There's little difference between those, but usually what VCs are comparing are things that are more like 2% chance at $1b vs 2% chance at $200m -- and then there's a big difference.

Also, if one company is a 5% chance chance at $200m but 0% chance of being worth more than that, while another company is a 1% chance of $1b, the second company might still be a better investment because it's probably 1% chance of $1b AND a 5% chance of $200m if it doesn't go all the way to $1b.

Re: Dilution

#107

Post by e1g »

grosbisou wrote: post #99
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.

>why was it bullshit?

It probably was bullshit because to raise money the company will usually create new shares - and doing this will always make all existing shares own a lesser percentage of the company.

Fun example time! Let's consider a company with 100 shares in total (as printed physical IOUs). An early-stage engineer received 1 of those shares, so they own 1% of the company. Fast forward to the next all-hands meeting, and a founder says they just raised a new investment round. Common practice suggests that the new investors just bought 25% of shares/IOUs. But where did these IOUs come from, if there were only 100 and all are distributed already? In essence, the company just printed new ones, much like the government can print new money. In this case the company started with 100 shares, then printed 33 new ones for the new investors, and now those investors own 33/133 shares or ~25% of the company. And our early-stage engineer owns 1/133 shares, or their ownership got "diluted" to 0.7% from 1%. Perhaps. Or perhaps the company printed 500 new shares, and the new investors now own 80% of the business (500/600 shares), and the engineer owns 0.16% instead of 1%. This is what the engineer is asking: "by how much did I get diluted?". The founder is replying "you didn't", which is mathematically impossible if new shares/IOUs were created. Of course now the engineer's 0.7% is probably worth more in $$$, but that wasn't what they asked.

That's under typical conditions, but it's possible that the founder was correct as long as the company did not print new shares. Two examples come to mind: (1) the founders sold some of their own shares to the new investors at a much higher price, thus keeping the total share count at 100 but implicitly increasing the price of the 1 share the engineer holds. This scenario is unlikely because it's seen as a bad signal - the founders are cashing-in and existing the venture. (2) The company had 100 shares, but only distributed 80 of them initially, so the new investors are getting their shares from the remaining unallocated pool. This means the total share count remains at 100, and the engineer still owns 1% with no dilution, and the price just went up and that's it. Having 10-15% unallocated for attracting talent is normal, but having ~25% unallocated for future fund raising is unnecessary complex and highly unusual.

Re: Dilution

#108

Post by e1g »

snarf21 wrote: post #105
sydd wrote: post #47

Earlier quoted context omitted.

Agree, I saw a startup where I worked go down because of too much money. They had a very good seed round and raised $2M. They used this to develop their first product, which did really well. After 2 years we had 50 employees and were breaking even, sometimes even a bit profitable, so we had even some extra in the bank. Obviously such numbers drove investors crazy, and they went to the highest amount they could raise…

This is the part I don't understand and am going through now. You raise a ton and get good at spending or you raise minimum and constantly bridge every time growth doesn't match plan, buying time to catch up or tweak. Why don't investors offer terms that have steps with growth KPIs (ones you can't spend your way to) that give you more money automatically if you make the metrics? As a company you don't have to constan…

Indeed a class of investors does exactly this - they provide unlimited but conditional money, set strict KPIs, embed their own people to steer the efforts in the desired direction, and generally take a hands-on role until they exit in 3-5 years. This investor class is "Private Equity" guys and girls, and they are 10-50 times larger than most VCs we talk about (on headcount, funds raised, investment sizes, reach etc).

I think it might be a matter of scale: VCs are tiny and they don't have the resources to take such an active role. Even the crazy successful legends like Accel/Sequoia/Benchmark/A16Z/USV/etc employ fewer people than an average company they invest into ~every month.

Re: Dilution

#109

Post by neom »

neom wrote: post #39

Money is simply wind in the sails.

The fact that I got voted down on this just goes to show the level of ability to understand reality HN has. HN is a bubble.

Re: Dilution

#110

Post by WalterSear »

marcofloriano wrote: post #51
k__ wrote: post #30

Earlier quoted context omitted.

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. T…

> With the advance of the internet marketing,

This is a myth. I've just parted ways with a second company in a row that had to discover for themselves that 'internet marketing' wouldn't magically solve their top-of-the-funnel problem.

Post reply on HN