Founder Dilution - How Much Is "Normal?"
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Re: Founder Dilution - How Much Is "Normal?"
#2Percentages are irrelevant, once you've lost controlling share it doesn't matter if you have 49% or 4.9% - as 4.9% of something > 49% of nothing.
Re: Founder Dilution - How Much Is "Normal?"
#3Percentages are irrelevant, once you've lost controlling share it doesn't matter if you have 49% or 4.9% - as 4.9% of something > 49% of nothing.
Since the percentage you own is also the percentage you can sell later, it certainly isn't irrelevant.
Re: Founder Dilution - How Much Is "Normal?"
#4Percentages are irrelevant, once you've lost controlling share it doesn't matter if you have 49% or 4.9% - as 4.9% of something > 49% of nothing.
This is not really true, but it seems to be a common thought here.
VCs are investing in the whole package of founder+product/idea. VCs, like any other investor, are inherently lazy in that they would much rather that somebody else do all the work while they make all the money.
If you maintain 49%, or even less, of a percentage you would generally only need 1 other board member to be on your side to "maintain control". No board or investor WANTS to go through the turmoil of replacing or fighting with the founders. If they did feel that way, they would likely not invest in the first place.
When the company does finally get to the point that the stock has some real exercisable value, you will wish you had 49% instead of 4.9%, given the opportunity.
Re: Founder Dilution - How Much Is "Normal?"
#520-25% for the management team? Perhaps MBA's aren't as "useless" as some folks preach they are. Just being qualified to be one part of this team puts you on an equal footing with founders in a startup after 4 rounds. Damn...
Who are these people? I am assuming that CEO/CTO are the founders, then you recruit COO, a VP of marketing, perhaps VP of business development... who else? Do these 3 new folks grab 20% of the company in addition to being paid salaries?
Re: Founder Dilution - How Much Is "Normal?"
#620-25% for the management team? Perhaps MBA's aren't as "useless" as some folks preach they are. Just being qualified to be one part of this team puts you on an equal footing with founders in a startup after 4 rounds. Damn... Who are these people? I am assuming that CEO/CTO are the founders, then you recruit COO, a VP of marketing, perhaps VP of business development... who else? Do these 3 new folks grab 20% of the c…
since they say its a late stage play, my guess the founders are pretty much kicked to the curb by this point. So CEO is most likely in play.
Re: Founder Dilution - How Much Is "Normal?"
#7Two thoughts come to mind:
1) the VC system needs to be reformed. If founders are being screwed like this (and I think it's reasonable to say this is a screw), they're going to find other ways to raise capital. (And they are!) VCs should be in the business of cultivating founders, of encouraging and then rewarding them.
2) This is all the more reason to sell your company; it's more realistic (post-dot-com-bust) anyway, and obviously, it's the way to profit the most. Plenty of companies are buying these days. You just have to find a way to make something worth buying (and that's the rub, isn't it?).
Re: Founder Dilution - How Much Is "Normal?"
#8And remember, there are usually 2-4 founders.
Re: Founder Dilution - How Much Is "Normal?"
#9Two thoughts come to mind: 1) the VC system needs to be reformed. If founders are being screwed like this (and I think it's reasonable to say this is a screw), they're going to find other ways to raise capital. (And they are!) VCs should be in the business of cultivating founders, of encouraging and then rewarding them. 2) This is all the more reason to sell your company; it's more realistic (post-dot-com-bust) anywa…
I'm not sure how founders are being screwed here. They are asking for (in most cases) millions of dollars to develop a likely unproven idea. Also, VC's are not in the business of coddling founders. They are making an investment that they hope will return a profit and that is what is expected by their investors. Places like YC try to cultivate and encourage the founders, but they only give you ~$10000. If you want a couple million then you have to be willing to play the game.
You are right in the fact that new startups should be looking at new and innovative ways to fund themselves and I hope that people take that point away from reading articles like this.
Re: Founder Dilution - How Much Is "Normal?"
#10Percentages are irrelevant, once you've lost controlling share it doesn't matter if you have 49% or 4.9% - as 4.9% of something > 49% of nothing.
Since the percentage you own is also the percentage you can sell later, it certainly isn't irrelevant.
So you'd rather have 49% of a dangerously under funded company than 4.9% of a well funded company?
If you sell equity for investment in to the business the total value of your shareholding has not reduced, but the company is more able to proceed.
Too many shareholders blindly cling to equity for the sake of keeping a high percentage - when the business would benefit from further investment.