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That's a dangerous place for an investor (angel investors are incredibly brave) because one of the tenents of the old rigid VC model is that follow-on investors
by netcan 17y ago
That's a dangerous place for an investor (angel investors are incredibly brave) because one of the tenents of the old rigid VC model is that follow-on investors will usually try to squeeze out the early investors.
I've heard this in several places before? Can someone explain how this is done? How can early investors be diluted without also diluting the founders?
- gridspy 17y agoFrom my limited knowledge, one of two ways: 1) The founders also get squeezed out 2) The founders have some sort of preferred shares.
- netcan 17y agoWhat exactly does #2 mean? Whenever new shares are issued, the founders get some more shares free?
- anamax 17y agoThere are lots of ways to do it. For example, the company could be set up so 10% of the company is owned by folks who have type A stock and 90% by owners of type B. The company can issue additional type B stock without issuing more of type A stock. That dilutes the value of each type B share without affecting the value of type A shares.
- netcan 17y agoThe reason I am confused is this: they still end up with something, sometimes, at least. Otherwise noone would do it. The question is then, why doesn't this become a reduced to absurdity example where past investors are always left with nothing. If they can be wiped out, why aren't they always wiped out?
- gridspy 17y agoThe VCs who did that would get a bad name. Also, it is in everyone's best interest that the angel investor network is healthy.
- angelbob 17y agoYou can dilute the founders, then vote to grant them more shares.
- alain94040 17y agoIn real life, both founders and earlier investors get diluted. The meager extra stock options given to the founders don't even come close of compensating from dilution for subsequent rounds.
- netcan 17y agoWell obviously everyone gets diluted as more money is invested. That makes sense. But, founders do still end up with substantial stock.
- johnrob 17y agoA tidbit of advice I got from a startup lawyer is that you want to provide value throughout the company's life. Apparently a lot of angels get screwed down the road (post VC) because they are no longer playing a big role. The founders, however, are often still playing an important role and get additional grants (especially if the founders are already fully vested after 3 or 4 years).