How much dilution makes sense for a founder

Ownership is a means to retain the founders

In the startup jargon, the term “ownership” refers to the percentage of the company that belongs to its founders or any other shareholder. In this post, we will explore how much ownership founders need to maximize the potential of their ventures. We will answer the question “how much dilution makes sense for a founder of a venture-backed startup?”

Source: Index Ventures (https://www.indexventures.com/rewardingtalent)

Founders’ ownership not only matters to entrepreneurs, but it also matters to savvy investors. Why? Because it helps to align the interest of investors and founders and incentivizes founders to stay in the company throughout the whole journey.

Ownership as a mean to retain the founders

When we assess an early-stage investment opportunity, among other criteria, we analyze the “Founder/Market Fit”. We evaluate how well equipped the founding team is to capture a (new) market opportunity. The team doesn’t need to be an expert in that market, but it definitely has to be an insider of the problem it is solving.

When we invest in a startup, it’s (also) because we think that a particular founding team is the best prepared to capture the opportunity that a (new) market has to offer.

The vast majority of startups fail or are sold before reaching Series B. For those startups who succeed after reaching Series B (which are the ones making most of the returns a VC makes), retaining the best team to navigate the whole journey is key. Most of the times, that team is the founding team, especially when it is pioneering new categories, making it the most knowledgeable team in a certain field.

Savvy VCs align their incentives with those of the founders and they make sure founders have an incentive to stay in the company as long as it is needed, so…