How Equity Dilution Impacts Early Stage Startups

Expert tips from SVB’s network as you consider raising capital 
(Originally published on svb.com)

HOW EQUITY DILUTION IMPACTS EARLY STAGE STARTUPS

Early stage founders often need to make time-sensitive fundraising decisions to propel their companies forward, yet they’ll freely admit that they rarely understand the long-term implications of their decisions.

We spoke with founders, investors, and advisors to hear their tips for making sound fundraising decisions that you can use to benchmark your own experience. Check out the full article, How Equity Dilution Impacts Early Stage Startups.


“Only take as much capital as you think you really need.” — Ian Foley, Founder and VC

For many entrepreneurs, a successful fundraising round is a time to celebrate. For Ian Foley, a veteran of four startups, it has always been a time of deep reflection.

The influx of money provides room to grow, but it comes at the expense of control and room to maneuver later on. By the time Foley founded AcuteIQ in 2014, he had learned a valuable lesson: only take as much capital as you think you really need.

Figuring out how much that is, of course, is the hard part. If you raise too much, you could give away an unduly large portion of your company. If you raise too little, you risk running out of cash before you achieve the milestones needed to go back to investors again. Meanwhile, understanding the ins-and-outs of various financing instruments — convertible notes, SAFEs, equity rounds — and their long-term implications can be daunting.

So how should you go about it?

Start with some good forecasting, do a fair amount of math and get help on cutting through the legalese. Below is advice highlights from startup founders and advisors who have done it before with some real math to follow. (We dig into each point below in our full article.)

  1. Don’t raise more than you need.
  2. Don’t rely on notes for too long.
  3. Don’t overthink a SAFE vs. convertible note.
  4. Use caps as your guide.
  5. Limit the options pool.
  6. Avoid super pro-ratas.

Startup equity dilution by the numbers.

To show how convertible notes and SAFEs can impact dilution over the long term, we traced the founder’s percentage ownership through two scenarios. In each case, everything after the seed investment is the same.

Scenario 1: A company that raises a $2.5 million seed at a $10 million post-money valuation. (Notes have a 20% discount, $8 million cap.)

*The statistical information is for informational purposes.

Scenario 2: A company that raises a $1.5 million seed at a $5 million post-money valuation. (Notes have a 20% discount, $8 million cap.)

*The statistical information is for informational purposes.

This material, including without limitation the statistical information herein, is provided for informational purposes only. Silicon Valley Bank is not responsible for any cost, claim or loss associated with your use of this material.


This post was originally published on svb.com, and part of a forthcoming series from The Founder VC. Stay tuned.

Are you a pre-seed, Series A startup interested in learning more? Send me a message at theron@svb.com or @theron

Thanks to those that have helped craft and publish this post.