

Founder Dilution - How Much Is "Normal?" - ciscoriordan
http://www.avc.com/a_vc/2009/02/founder-dilution-how-much-is-normal.html

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jacquesm
This 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
Agreed. I wrote some of my thoughts down recently here:
[http://david.weebly.com/1/post/2009/02/does-capital-
efficien...](http://david.weebly.com/1/post/2009/02/does-capital-efficiency-
matter.html)

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
I read your post, and a similarity struck me between your situation and the
one I was in with a competitor funded to the tune of 30M US by two very large
companies. We were approached with the intent to acquire, but the management
team there was - to put it mildly - a little strange, so we declined. After 3
years they had burned through the whole wad and the plug was pulled.

It was the weirdest experience, to out-compete a company that has such
enormous backing with a team of very few but very dedicated people in two
small offices (one in Toronto, another near Amsterdam).

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russell
As 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.

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sunilbhargava
For 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.

------
old-gregg
_20-25% 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?

~~~
atarashi
He probably means management team + other employees. Isn't the total
_employee_ option pool about 20%?

~~~
lacker
Yes - in the comments he states the 20-25% includes all employees.

------
anamax
One 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
> Even if it's 1-2% at exit ....

It's not - it's <0.5% at exit.

------
aliasaria
And remember, there are usually 2-4 founders.

~~~
herval
I 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

~~~
albertsun
An odd number you mean?

~~~
herval
yes... sorry!

------
mtkd
Percentages 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
Since the percentage you own is also the percentage you can sell later, it
certainly isn't irrelevant.

~~~
mtkd
So 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
Meh. Most companies are "dangerously underfunded" until they're cash flow
positive.

------
thorax
I 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>

------
JayHa
completely 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>

------
kubrick
Two 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
I'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
They'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
10% of a million dollar company isn't practically nothing.

~~~
kubrick
It'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.

