How does startup equity dilution work?
Dilution is the decrease in equity ownership by existing shareholders that happens each time you issue new shares, like during a fundraising or when you create an option pool. In total, there are now 13,000 shares of company stock—and just like that, you now own only 77\% of your company (10,000/13,000) instead of 100\%.
Do founder shares get diluted?
As founders of startups raise money from investors, their share of the company gets “diluted”. This means the percentage of the company they own gets smaller and smaller.
How much equity should a founder get?
As a rule, independent startup advisors get up to 5\% of shares (or no equity at all). Investors claim 20-30\% of startup shares, while founders should have over 60\% in total.
How much equity do founders usually keep?
The equity split at 20\% for the founders will typically be; 20-25\% for the management team, 20\% for the founders, and 55-60\% for the investors (angel all the way to late stage VC).
How do investors get diluted?
Dilution occurs when a company issues new shares that result in a decrease in existing stockholders’ ownership percentage of that company. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
What is dilution and why is it important for founders?
This is known as dilution and being able to map this out from day one and in multiple scenarios is important so that, as a founder you can protect your equity (possibly). As more funding rounds occur, early investors will also become diluted – not just the initial founders.
What happens to equity when a company is diluted?
So, as mentioned above, at each stage of investment, the equity of the earlier investors or founders (equity holders) will get diluted. But, with higher valuations in every round, the diluted equity will have more value than in the previous round.
How does raising a safe affect dilution?
The type of SAFE you raise can impact your eventual dilution. With pre-money SAFEs, each investor’s ownership percentage is up in the air until you raise your next round, at which point the math plays out and everyone learns how much they own.
What happens when you raise money at a startup?
This post originally appeared on TechCrunch. Dilution. Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up.