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Founder Dilution - How Much Is "Normal?"

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Re: Founder Dilution - How Much Is "Normal?"

#11

Post by liuliu »

kubrick wrote: post #7

Two 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…

thing is, you should put the value of money in a more important position. If you are looking for fund, that means your "business" here need more money to start or level up otherwise you can self-fund. Under that circumstance, without the money, you can achieve nothing. To find VC for funding is a fair game in the end (despite somehow the connection plays an important role here). It is a open market, you need money, and they take shares. A business is a business not an idea because someone has to do it and someone actually fund it.

Re: Founder Dilution - How Much Is "Normal?"

#12

Post by jacquesm »

This is like an equation where the earlier you go outside for capital the bigger the chance that you will end up with a very small slice of your company and a possible lack of control.

If you're halfway smart - and you'd better be if you plan to play the game well - then you should stretch your own means as far as you can. If you're dirt broke and you want to start a new company it better be something that is profitable within 30 days.

If that is not in your future then consider doing two things, one with a short ttm to fund the other. That way you can develop your 'big idea' to the point where you've proven its merits by having your first batch of users on board or whatever metric you use to measure your success.

The worst way to start a new company is to just have an idea and to start looking for funding. By the time it is a running business you'll have nothing left.

No point in blaming the VC's for that, an idea is just that, an idea. I have a notebook here that contains a bunch of ideas. Each and every one of those is potentially a company worth some money if you put in a couple of years of sweat and brain power. Without that they're just ideas and I personally value them at exactly $0.

edit:

Another really good reason to go the 'spend your own $ first' route is that you show with your own money that you really believe in your idea, that will go a long way towards convincing people that you are serious.

Re: Founder Dilution - How Much Is "Normal?"

#13

Post by atarashi »

old-gregg wrote: post #5

20-25% 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…

He probably means management team + other employees. Isn't the total employee option pool about 20%?

Re: Founder Dilution - How Much Is "Normal?"

#14

Post by herval »

aliasaria wrote: post #8

And remember, there are usually 2-4 founders.

I have a couple of enterpreneur friends that say that you should always aim for an even number of founders (3 in the best scenario, never 1, hardly ever 5). Having an even number helps when 'voting' things, so the tendency is to keep things moving... having been an enterpreneur myself (with 3 other people), I must agree with them

Re: Founder Dilution - How Much Is "Normal?"

#15

Post by albertsun »

herval wrote: post #14
aliasaria wrote: post #8

And remember, there are usually 2-4 founders.

I have a couple of enterpreneur friends that say that you should always aim for an even number of founders (3 in the best scenario, never 1, hardly ever 5). Having an even number helps when 'voting' things, so the tendency is to keep things moving... having been an enterpreneur myself (with 3 other people), I must agree with them

An odd number you mean?

Re: Founder Dilution - How Much Is "Normal?"

#16

Post by tptacek »

mtkd wrote: post #10
gjm11 wrote: post #3

Earlier quoted context omitted.

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.

Meh. Most companies are "dangerously underfunded" until they're cash flow positive.

Re: Founder Dilution - How Much Is "Normal?"

#18

Post by russell »

As a counterpoint, my son and two of his buddies started a company to create a specialized chip. After 6 months they hired a CEO who had founded his own company and sold it for 9 figures (I believe). The CEO got no salary and got stock only if he raised the necessary funding. Six months later he raised mid 7 figures from angels and the founders still had control. They have since raised another similar round from angels.

Interestingly, they used VC's to recruit the CEO, but not for the money.

Re: Founder Dilution - How Much Is "Normal?"

#19

Post by ciscoriordan »

kubrick wrote: post #7

Two 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…

If you just glance at the numbers it looks like they're being screwed. But at each round (while they still had control) the founders got to decide if taking funding would be better for the company and themselves.

There's no rule that says founders get to keep large percentages of their companies.

Re: Founder Dilution - How Much Is "Normal?"

#20

Post by sunilbhargava »

For companies that need significant teams and years to get traction this is a reasonable model that has worked for years. The VC’s are optimized for plays that have 10’s of millions in and 100’s out.

There is a new breed of companies that are far more nimble and don’t need 10’s of millions in. The main issue for these companies is how do they extend the team and get the (limited) capital they need to execute the business beyond the product.

At Tandem Entrepreneurs we have a model that works for such companies (there are probably others models out there as well).

We serve as the extended team for founders. The result is that the founders get to keep a much larger chunk of the company as the extended team doesn’t add burn. We also serve as the investors so there is no time wasted raising money or hiring.

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