Dilution can be tricky.
As you raise money for your startup, often, your ownership decreases. The hope is that by exchanging equity for capital, you are able to improve the odds of increasing your companies' value in the future.
There are a variety of reasons why your equity percentage may decrease over time:
- Issuing new shares to equity investors
- Stock options for employees
- Strategic advisors
- Board of directors
So why would you decide to share your company with these stakeholders and reduce your personal ownership?
- Invest in sales & marketing activities to grow more quickly, by using outside capital
- Attract and retain a high-quality employee base through an employee stock option plan
- Incentivize key advisors to support and fuel business growth
- Partner with strategic relationships in the market in order to open doors for expansion
What should I expect as I approach my first round of venture funding?
If your goal is to raise institutional venture capital, there are a few questions you need to ask yourself and a few steps you need to be prepared for ahead of going to market:
- Am I a 'venture-backable' company? Do I have the market potential for 100x growth? Is my target market large enough?
- Am I in an industry that venture capital invests in? Are there funds that invest in my niche?
- Do I know what I want out of an outside investor? Just money? Expertise? Resources?
- Is my product ready? Do I have third-party validation?
- Am I ready? Do I want to give up a part of my company? How much do I feel comfortable with letting go?
When it comes to raising your first institutional round, often times, your lead investor will work with you to set the terms for your raise - investment vehicle, total capital, valuation, discount, etc. It is great to have those details down (as much as possible) ahead of a conversation with an investor, while knowing that the nuances may change.
As your fundraise details change, you need to understand the impact on your ownership impact. We created a calculator in order to help you better understand your dilution.
See a preview of the calculator below and click the link in order to download your own template.
Click on Use Template.
SAFE and Convertible Note calculators coming soon.