Dilution can be a double-edged sword for pre-seed founders. Raising more capital will be essential to fund their startup's growth, but on the other hand, dilution reduces their ownership stake in the company (less control, less decision-making power). Also, some VCs may require significant equity ownership as part of their investment terms, which can lead to substantial dilution for pre-seed founders. Here are best practices on how to shield yourself from this: 1?? Raise only what you need. Over-funding can dilute your ownership stake. Accurate budgeting and raising only what you need to achieve the next milestone makes for a more efficient dilution control. 2?? Negotiate the best terms. Aim to negotiate the most favorable terms with your investors: higher valuation, lower equity or convertible debt. The balance to maintain here is to have investor-friendly terms that are fair for both parties. 3?? Grant equity responsibly How much equity you give to employees, advisors, and other stakeholders matters when it comes to avoiding excessive dilution. One VC told me if they see an Advisor on the Cap Table with double-digit equity ownership, they will be asking what they bring into the business. 4?? Go non-dilutive. Consider other forms of capital when available - e.g. debt and revenue. Product-led businesses typically have fast pathways to profitability. Build a business model in a way that supports revenue generation from the earliest stages. Anything else - feel free to add in the comments! #capitalraising #vcfunding
I struggle with convertible debt at pre-seed. You're asking an investor to take pre-seed risk for seed equity (and seed risk for series A equity). I know it's common place in the US early stages but that is a market that's 10x the size of the UK, where investors have far higher value expectations and therefore pay more than here. The failure rate at pre-seed isn't much different between the 2 locations so you can start to understand why it's not widely used at pre-seed.
We’ve seen at SeedLegals that raising your earlier stage rounds through SeedFAST (ASAs) enables startups to delay their valuation, use the cash injections to boost their valuation and hit key milestones, and save more equity in the long run - without having the interest rates and debt that accrues with instruments like convertible loan notes. Has boosted company valuations enormously in the past year when valuations have been hit hard by market concerns!
It's such a difficult balance. I always advise founders to raise as much as they can as early as can but the dilution needs to be palatable too. I've seen Seed stage businesses where Pre-Seed investors have taken 50% of the cap table. It's completely broke and very difficult to raise funding from there. If you're giving up more than 25% of your business for any round, even in this climate, you need to think long and hard about it!
Pre-seed founders face a dilemma with dilution - raising capital is crucial for growth, but it reduces ownership and control. To minimize dilution, founders should raise only what they need, negotiate favorable terms, grant equity responsibly, and consider non-dilutive capital. It's crucial to strike a balance between investor-friendly terms and fair deals.
Non-dilutive pre-seed is usually pre-revenue in most cases and therefore getting debt is almost impossible. So the best chance is government grants.
Oh come on. This is what I said to you before. Good business opprtunitied don't need to sell down. They offer opportunity for others by investing into support the up! We don't need lazy money. Remember that conversation?
Negotiation never comes easy. What you mentioned can actually leave us with a win-win deal! Love this Eva!
Grant funding. There is a whole range of grants out there. A bit of research, a bit of hard work going through the application process etc, but it is worth it. Grants are non-dilutive and existing investors love them for obvious reasons.
Turning startups into scaleups ??, Award winning founder of Turnkey & Beyond Brand, Business Person of the Year 2023
1 年Raising capital isn’t the only consideration for delivering growth though Eva. We don’t inject any capital into a startup and we take a significant equity ownership of our ventures…. But then we take them on a growth journey that will accelerate their growth far quicker than a runway of cash, even though we walk with them on that part of the journey too. 100% of nothing is still nothing, so founders have to get their heads around what they are receiving for the equity they dilute by. Cash may be an immediate fix that lasts for a short while, but it is soon forgotten once it runs out. A true investment keeps delivering for the duration of the company’s growth…. Which is why founders don’t even question the equity that we take in the valuation process at Turnkey. The board they can’t afford is a priceless asset, so how could they ??