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Founder Dilution - How Much Is "Normal?"
- mtkd 18y agoPercentages 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.
- gjm11 18y agoSince the percentage you own is also the percentage you can sell later, it certainly isn't irrelevant.
- mtkd 18y agoSo 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.
- tptacek 18y agoMeh. Most companies are "dangerously underfunded" until they're cash flow positive.
- brk 18y agoThis 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.
- old-gregg 18y ago20-25% 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?
- vaksel 18y agosince 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.
- atarashi 18y agoHe probably means management team + other employees. Isn't the total employee option pool about 20%?
- lacker 18y agoYes - in the comments he states the 20-25% includes all employees.
- kubrick 18y agoTwo 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?).
- jmackinn 18y agoI'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.
- kubrick 18y agoThey're being screwed: after developing a workable idea and putting years of work into it, they come away with practically nothing. If that's "the game" then no wonder founders are turning away from VCs. That's why I'm suggesting VCs change. Stop short-changing the founders. VCs with no founders are not VCs.
- astine 18y ago10% of a million dollar company isn't practically nothing.
- kubrick 18y agoIt's not much when you a) have to split it 2 or 3 ways, and b) have to watch the VCs take home several times as much, when you did all the work. My point is that there is a value judgement here. VCs are being overvalued, and founders are being undervalued. This serves to demoralize and demotivate the founders, ultimately hurting the value of the company. It doesn't need to be that way.
- aliasaria 18y agoAnd remember, there are usually 2-4 founders.
- herval 18y agoI 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
- warkaiser 18y agoEven further dilution. How important is a 5 million cashout when you only have 7% left of the company you slaved on for three years? I never plan on taking VC money if it is at all possible to avoid.
- jacquesm 18y agoThis 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.
- drusenko 18y agoAgreed. I wrote some of my thoughts down recently here: http://david.weebly.com/1/post/2009/02/does-capital-efficiency-matter.html http://david.weebly.com/1/post/2009/02/does-capital-efficien... Essentially, while running a grossly underfunded company is definitely bad, that's not to be confused with a "raise insane amounts of money and spend it indiscriminately" attitude. Doing the most with the least amount of money is still the best way to maintain maximum ownership, but it should definitely be balanced against the risks of not being properly capitalized, where "properly" is certainly open to interpretation.
- jacquesm 18y agoI even think that some initial funding constraints will sharpen your wits in ways that nothing else can.
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- JayHa 18y agocompletely unrelated but still frustrating. i get this message whenever i try and submit something to HN, what is that mean besides the obvious i'm not even submitting fast. "You're submitting too fast. Please slow down. Thanks." link: http://news.ycombinator.com/x?fnid=EQ89mTm1oN http://news.ycombinator.com/x?fnid=EQ89mTm1oN
- russell 18y agoAs 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.
- sunilbhargava 18y agoFor 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.
- thorax 18y agoI typed-up a long comment, but just decided to submit it instead to YC as a blog post: http://news.ycombinator.com/item?id=490145 http://news.ycombinator.com/item?id=490145
- anamax 18y agoOne interesting answer was to "Let's say the 2 co-founders (1 engineer 1 business-type) have just gotten $100k angel and are hiring an engineer. What sort of equity range for that engineer would you expect." The answer was "1-2%". It's unclear if that's 1-2% at exit, after the first VC round, after the angel round, before the angel round, or what. Even if it's 1-2% at exit ....
- anamax 18y ago> Even if it's 1-2% at exit .... It's not - it's <0.5% at exit.