Equity Dilution

In the early days of the startup, the founders should raise only the amount of funding necessary to achieve the next milestone.

The valuation of the company is low but will rise when adding products, revenue, and team members.

Raising too much early on will cause the founders to suffer dilution.

Pursue the bigger funding in later rounds when the valuation of the company is higher.

It’s important to define very specifically what you are trying to achieve and know what this will cost.

Here are some other ways to reduce equity dilution:

Keep the discount rates on convertible notes and safe notes to a minimum.

Set up an option pool for employees but keep it in bounds.

Look out for pro rata terms that give some investors an outsized position.

Test your proposed terms sheets by inputting them into your cap table and displaying them as a fully diluted version.

In the early stages think minimum — minimum fundraise, minimum viable product, minimum team.

This will reduce the amount of equity you are giving away.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.