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Dilution

blog.ycombinator.com

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Re: Dilution

#111

Post by equalarrow »

Great post, I love it!

I definitely have an opiniosn.

I've raised money, couldn't raise money, have had friends that couldn't, have ended up having friends slogging through to become millionaires without any vc, and even turned down rounds hoping to get more.

Now when I look back and think "how would I do this now?" I come to two conclusions.

1. If I want to own an idea as a business owner over the long term, then I don't care about investors. This is my Basecamp spidey sense and convictions. My happy path.

2. My idea is great, I need some money. However.... Nowadays I'm thinking along the lines of "long term (hopefully,, but I suspect that most people don't care bs long term"", which is not SV or wall st friendly. I am seriously looking at non-profit.

Uggggh!

I've been through #1 a gazillion times and now, since I have a family and a diff outlook on life, I'm looking longer term.

But, how does the 'family dude' perspective conflict with the Uber perspective?

Growth is the altar that we all kneel to. The Iron Throne. But, it doesn't have to be this way. Granted, we all have Maslow's needs and that varies based on a number of factors (geographic, personal, etc). But in the end, what is our purpose?

Are we here to sustain sexual harassment via star pupils at Uber so they that their 'CEO' can grow? (At the expense of human beings?)

What is the point of growth or even exponential growth? Money? Riches?

Look, I think YC is better than not and I think that we - we tech people - need to lead the way because we 'can'. Thumbs up on riches, algorithms, and technology. These are awesome progressive things!

But, seriously, after going thru the vc grinder, seeing the cap tables of founders and everyone else and then THEN (stupidly) agreeing to this inequity.. Well, the fault is obviously mine but there is is (a lot) of fault with these pump and dump startups.

Re: Dilution

#112

Post by lmeyerov »

This felt more from a VC perspective than a founder's one..

1. VCs have portfolios and can talk about averages. As a founder, you're dealing with your particular reality, and as startup phases are inherently high variance... your terms will be all over the map, and not driven by your dilution aspirations. Oh, SaaS crashed this quarter and you lost your F100 account? Too bad for you. Bots are in? Sweet!

2. I'm surprised by the dilution percentages here: I'm guessing they're for the top 10% or so, where everything already aligned anyway. Likewise, I'd expect it for something like a SaaS snack boxes -- stuff where averages and predictability make sense from day 1, not crazy bumpy tech etc. Otherwise, for example, VCs will fight HARD for their % minimums. So, 10-15% sounds like one VC at their absolute bottom... and therefore not normal.

3. 7% might be what accelerators converged on... but that's high compared to F&F, angels, & specialized advisors in your field (vs "startups").

Re: Dilution

#113

Post by lpolovets »

Brushfire wrote: post #98
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…

That's a great way to prioritize those three things. Existential risk is always #1.

Re: Dilution

#114

Post by onion2k »

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.

You're assuming that all equity is equal. It isn't. For example, shares given to employees are often non-voting. A company could have 99.99% of the equity in non-voting stock, meaning whoever holds the 0.01% that have voting rights controls the company.

When it comes to shares "ownership" does not directly correlate with "control".

Re: Dilution

#115

Post by syllogism »

nostrademons wrote: post #104
tbrowbdidnso wrote: post #101

Earlier quoted context omitted.

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.

Board control isn't the problem at seed. You'll usually have board control. But if you need another round of funding, the investors control the company.

If your seed investors are "name brand", and they pass and say, "Ah yes, they're very nice guys. Wonderful conscience, very punctual. Unfortunately I can't follow on, my capital's already allocated. I wish them luck.", you'd better have a plan for profitability.

Re: Dilution

#116

Post by lancewiggs »

lpolovets wrote: post #37
lancewiggs wrote: post #33

Earlier quoted context omitted.

We are VC/early stage investors in New Zealand, and give the advice constantly to raise as little as possible at each stage - and plan to get back to cash-flow positive if another round does not turn up. It's a function of our lean investor ecosystem here, but it also creates companies that treasure every dollar and are even more attractive for investors.

I think that's a great mindset to have and to encourage. My main argument is that "as little as possible" -- especially in Silicon Valley -- is usually much closer to 20% than 10% dilution at seed. E.g. an FTE salary might be $125k-150k/yr, and selling 10% at a $5m cap gives you enough capital for 3-4 people for a year, which is a very small team and very little time to make enough progress to raise a Series A.

Sure. Our overheads are a lot lower here - free healthcare, Xero for accounting and a simple tax system makes things easy, low rent, reasonable salaries (but a better standard of living) and so on. And no capital gains tax.

Re: Dilution

#117

Post by g10r »

100k wrote: post #20
kinkrtyavimoodh wrote: post #18

Earlier quoted context omitted.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

Sadly, four years of "heroic effort at failing startup" doesn't look as good on the resume as "worked at Google".

That experience is invaluable to anyone who can adapt and apply the learned mistakes to future work. Especially so if being applied to a startup environment. You have to be laser focused, gritty, willing fight 24/7/365 for years. This doesn't just apply to the founder/CEO it applies to anyone involved early stage, every day is just too mission critical and the entire team needs to be aware of the consequences. For the most part or most teams, you don't learn that at Google. That's who i'd want on my team at least.

Re: Dilution

#118

Post by g10r »

e1g wrote: post #108
snarf21 wrote: post #105

Earlier quoted context omitted.

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).…

Yep. Think KKR, Apollo, Blackstone, Ares Management. They get after it :)

Re: Dilution

#119

Post by dandare »

Am I the only one who cringes when entrepreneur uses the amount of raised money to introduce/describe himself?

"...during my career I have raised $100 million..."

Yeah? And how much value did you create?

Re: Dilution

#120

Post by sokoloff »

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…

VCs can't reasonably invest in a company where their upside is capped at a 5x return, because they need the long tail, 20x-100x returns to pay for all the 0x returns in the portfolio.

No, a VC doesn't hate you at the end of the game if they get paid 5x. That's different than answering the question "Will they invest for a promise of a 5x return?"

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