Reducing the Impact of Dilution on Early-Stage Companies
November 26, 2018
By Alan Wink
Dilution is one of those necessary evils for founders, angel investors and employees of most early-stage companies. For a company to grow and thrive, it needs to attract external capital and talent. This most likely will require offering equity and diluting the ownership interests of prior investors and team members. It becomes even more challenging for early-stage companies that hit a rough patch in their development and must obtain greatly needed investment through a highly dilutive down-round.
Dilution can be a risk for angel investors, other financing sources, even potential employees. As such, top management of early-stage companies often ask how they can minimize dilution. While doable, it’s not easy. It should come as little shock that founders may have to give up as much as 10% to 30% of their equity to raise startup seed capital. While dilution can be constrained somewhat, try to keep the matter in perspective: Dilution is part of a company’s evolution and a key component for future growth and success.
Among the tactics used to effectively reduce the dilution on early-stage companies:
- Financing growth through the issuance of convertible notes or other convertible debt.
- Establishing an option pool of equity to incentivize employees.
- Exercise discipline in deploying capital to reduce the need for external financing.
To learn more about the aforementioned tips and nuances for reducing the dilution on early-stage companies, check out the full article.