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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 excessiv

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 of convertible notes show that even after raising seed rounds, many companies need more capital to get to a series A. It's also interesting to note that the 10% figure is coming from YC, which takes 7%. That's a considerable amount of dilution, too (and very worth it, IMO). Finally, I've never been a founder, but I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder. So the dilution seems less important than having enough capital for a successful outcome. I'd rather have 60% of a small exit than 80% of a $0 exit. I do believe in constraints and good cash management, so regardless of how much founders raise, they should be conservative with spend until they have strong product market fit.

lancewiggs 10y ago
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.
- lpolovets 10y ago
  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.
  - lancewiggs 10y ago
    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.
tyre 10y ago
I agree. Ironically, this was the advice we got while going through YC (yours, not Sam's.) Specifically: don't worry about valuation because success is binary. You either make enough money that you don't care too much about percentage or you make zero dollars in which case you don't care about percentage. The idea of constraints helping to focus a team sounds true, as long as people have enough to not worry about money. Note that this advice comes from Sam, who literally got scurvy from eating too much Ramen while a founder of Loopt.
- ryandrake 10y ago
  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?
  - lpolovets 10y ago
    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/ 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 $1b, but if there's no chance of $1b+ then there's basically no chance that a company will product very meaningful returns for its investors.
    - aianus 10y ago
      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.)
      - lpolovets 10y ago
        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.
coffeemug 10y ago
> I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder As an ex-founder I never understood why people make this argument because it's completely symmetric. I.e. I could rephrase it as "I imagine if a company becomes enormous, I'd care less whether my outcome was $200m or $250m as a VC" I agree with the advice in the article but would phrase it slightly differently -- work hard to structure your company such that you can get away with raising as much as you need and still give away only 10%-15% each round. (Or, yet another way to put it, build a company so successful that you can dictate the terms)
- lpolovets 10y ago
  People do make that symmetric argument, actually :). A lot of people in the ecosystem, both founders and VCs, will say things like "investors shouldn't be price sensitive, because if you've found the next Uber, it doesn't matter if you get in at a $10m cap or a $15m cap."
  - crdb 10y ago
    What is your response to that argument?
    - bytecodes 10y ago
      If you've found the next Uber, that's exactly when it matters.
    - lpolovets 10y ago
      To be completely honest, I don't really view things from that frame. I think more about 1) how much does this company need to execute on their plans? and 2) what would a fair valuation be given their current progress and market comps? If that's 10% dilution then that's fine. If that's 25-30% dilution that's also fine -- but more dilution would be scary. Usually it's 20-25% dilution -- e.g. a fair pre-valuation might be $6m, and the company wants to raise $1.5m or $2m for 18 months to do X, Y, and Z. If the valuation feels unreasonably high then I'll try to negotiate, or I'll just pass. If the valuation is low and results in too much dilution, then I'll try to figure out with the founder if they can make progress with less money/dilution, or I'll just pass -- because overdiluting sucks for the founder and will also eventually suck for me as an investor by capping the upside. I think this framing works for the founder, too: if you need $X for your near term plans, and you're getting a fair valuation that doesn't overdilute you, then that's good. If the valuation is unfairly low, try to find other options. If it's unreasonably high, then that's okay if you are good with cash management -- but be mindful that the higher your current valuation, the higher investors' expectations will be for your next round.
3pt14159 10y ago
To me it's about the control more than it's about the money. If preferred shares got half the voting rights as common then the difference between a 10% seed and a 15% seed isn't as bad, but after accelerator / angel takes 7%, seed takes 15% and possible bridge + series A takes 30% you're down to raising a series B and admitting that you're no longer in control of the company.
austenallred 10y ago
My first reaction was "wow my company must have sucked." And granted on many levels we did (and were never close to being the hottest company in the world), but if I fought for 10% seed dilution I would have been laughed out of the room. Maybe it's different if you're a shit-hot YC company, but man. I thought you were successful if you stayed below 20% at seed.
- lpolovets 10y ago
  Yeah, my ballpark estimate from my portfolio (~50 investments in my fund + ~20 personal angel investments) is that 20-25% dilution is common at seed stage. Occasionally it's 15%, which is great. Occasionally you also see 30+%, and that's pretty bad.
  - new2 10y ago
    Would it possible to provide more granular data(anonymized, of course)? What was the mean, median etc dilution for your seed investments? And same for when your portfolio companies go on to raise a Series A? Thanks!
    - lpolovets 10y ago
      This free report is an excellent resource on average dilution at each round: https://www.capshare.com/blog/dilution-101-startup-guide-equity-dilution/ https://www.capshare.com/blog/dilution-101-startup-guide-equ...
yosefk 10y ago
One big problem with dilution isn't that you make less money but that you lose control of the company. And poor decisions by investors are a good contender for the #1 thing killing companies. For a VC this is yet another bet which they don't quite understand or care about, compared to a founder for whom it's the bet, and they understand it and care about it much more. Founders being in control is better than VCs being in control.
codingdave 10y ago
> I'd rather have 60% of a small exit than 80% of a $0 exit. 60% is one funding deal away from becoming a minority stake, while 80% leaves room to do another deal while still maintaining control. Money is not the only concern here.
- CalChris 10y ago
  But he's talking about exit and not control after another round.
  - codingdave 10y ago
    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 mind.
    - CalChris 10y ago
      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.
Brushfire 10y ago
(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 triangulate on 10%. It's worth noting that this game is even harder outside of the valley, because while operating costs are significantly lower, so are valuations, and most companies will bump into minimum cash needs for 12-18 months. Sam made a good point: running out of money is way worse than optimizing for your cap table. Let me make a second point: Optimizing for success is way more important than optimizing your cap table. In other words: If you believe a specific investor meaningfully adds to the probability of a success state for your company, then its probably a good bet even if you are not happy about the dilution. In order of what you should care about: 1. Not running out of money. 2. Finding people who can be value-add and help you prevent mistakes and find success. ... 3. Dilution (within reason). Also, you can always recap founders in later stages. It happens.
- lpolovets 10y ago
  That's a great way to prioritize those three things. Existential risk is always #1.

lancewiggs 10y ago

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.

lpolovets 10y ago
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.
- lancewiggs 10y ago
  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.

tyre 10y ago

I agree. Ironically, this was the advice we got while going through YC (yours, not Sam's.) Specifically: don't worry about valuation because success is binary. You either make enough money that you don't care too much about percentage or you make zero dollars in which case you don't care about percentage. The idea of constraints helping to focus a team sounds true, as long as people have enough to not worry about money. Note that this advice comes from Sam, who literally got scurvy from eating too much Ramen while a founder of Loopt.

ryandrake 10y ago
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?
- lpolovets 10y ago
  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/ 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 $1b, but if there's no chance of $1b+ then there's basically no chance that a company will product very meaningful returns for its investors.
  - aianus 10y ago
    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.)
    - lpolovets 10y ago
      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.

coffeemug 10y ago

> I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder As an ex-founder I never understood why people make this argument because it's completely symmetric. I.e. I could rephrase it as "I imagine if a company becomes enormous, I'd care less whether my outcome was $200m or $250m as a VC" I agree with the advice in the article but would phrase it slightly differently -- work hard to structure your company such that you can get away with raising as much as you need and still give away only 10%-15% each round. (Or, yet another way to put it, build a company so successful that you can dictate the terms)

lpolovets 10y ago
People do make that symmetric argument, actually :). A lot of people in the ecosystem, both founders and VCs, will say things like "investors shouldn't be price sensitive, because if you've found the next Uber, it doesn't matter if you get in at a $10m cap or a $15m cap."
- crdb 10y ago
  What is your response to that argument?
  - bytecodes 10y ago
    If you've found the next Uber, that's exactly when it matters.
  - lpolovets 10y ago
    To be completely honest, I don't really view things from that frame. I think more about 1) how much does this company need to execute on their plans? and 2) what would a fair valuation be given their current progress and market comps? If that's 10% dilution then that's fine. If that's 25-30% dilution that's also fine -- but more dilution would be scary. Usually it's 20-25% dilution -- e.g. a fair pre-valuation might be $6m, and the company wants to raise $1.5m or $2m for 18 months to do X, Y, and Z. If the valuation feels unreasonably high then I'll try to negotiate, or I'll just pass. If the valuation is low and results in too much dilution, then I'll try to figure out with the founder if they can make progress with less money/dilution, or I'll just pass -- because overdiluting sucks for the founder and will also eventually suck for me as an investor by capping the upside. I think this framing works for the founder, too: if you need $X for your near term plans, and you're getting a fair valuation that doesn't overdilute you, then that's good. If the valuation is unfairly low, try to find other options. If it's unreasonably high, then that's okay if you are good with cash management -- but be mindful that the higher your current valuation, the higher investors' expectations will be for your next round.

3pt14159 10y ago

To me it's about the control more than it's about the money. If preferred shares got half the voting rights as common then the difference between a 10% seed and a 15% seed isn't as bad, but after accelerator / angel takes 7%, seed takes 15% and possible bridge + series A takes 30% you're down to raising a series B and admitting that you're no longer in control of the company.

austenallred 10y ago

My first reaction was "wow my company must have sucked." And granted on many levels we did (and were never close to being the hottest company in the world), but if I fought for 10% seed dilution I would have been laughed out of the room. Maybe it's different if you're a shit-hot YC company, but man. I thought you were successful if you stayed below 20% at seed.

lpolovets 10y ago
Yeah, my ballpark estimate from my portfolio (~50 investments in my fund + ~20 personal angel investments) is that 20-25% dilution is common at seed stage. Occasionally it's 15%, which is great. Occasionally you also see 30+%, and that's pretty bad.
- new2 10y ago
  Would it possible to provide more granular data(anonymized, of course)? What was the mean, median etc dilution for your seed investments? And same for when your portfolio companies go on to raise a Series A? Thanks!
  - lpolovets 10y ago
    This free report is an excellent resource on average dilution at each round: https://www.capshare.com/blog/dilution-101-startup-guide-equity-dilution/ https://www.capshare.com/blog/dilution-101-startup-guide-equ...

yosefk 10y ago

One big problem with dilution isn't that you make less money but that you lose control of the company. And poor decisions by investors are a good contender for the #1 thing killing companies. For a VC this is yet another bet which they don't quite understand or care about, compared to a founder for whom it's the bet, and they understand it and care about it much more. Founders being in control is better than VCs being in control.

codingdave 10y ago

> I'd rather have 60% of a small exit than 80% of a $0 exit. 60% is one funding deal away from becoming a minority stake, while 80% leaves room to do another deal while still maintaining control. Money is not the only concern here.

CalChris 10y ago
But he's talking about exit and not control after another round.
- codingdave 10y ago
  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 mind.
  - CalChris 10y ago
    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.

Brushfire 10y ago

(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 triangulate on 10%. It's worth noting that this game is even harder outside of the valley, because while operating costs are significantly lower, so are valuations, and most companies will bump into minimum cash needs for 12-18 months. Sam made a good point: running out of money is way worse than optimizing for your cap table. Let me make a second point: Optimizing for success is way more important than optimizing your cap table. In other words: If you believe a specific investor meaningfully adds to the probability of a success state for your company, then its probably a good bet even if you are not happy about the dilution. In order of what you should care about: 1. Not running out of money. 2. Finding people who can be value-add and help you prevent mistakes and find success. ... 3. Dilution (within reason). Also, you can always recap founders in later stages. It happens.

lpolovets 10y ago
That's a great way to prioritize those three things. Existential risk is always #1.