Control Dilution Part 2

The number one thing that all first-time founders seem to have in common (myself included) is a very weak understanding of fundraising and cap table management. Now that I’m in the investor chair at Aviso Ventures, I find myself sharing these tips with almost every new founder I speak with. These tips come from personal learnings (sometimes the hard way) starting and building Signal Sciences as well as investing in over 50 start ups.

This is part 2 of a 5 part series of suggestions to help founders identify ways they can sell less of their company while still building a great one.

Quick PSA: all these suggestions have tradeoffs associated with them. Decisions around this topic needs to be evaluated in the context of your specific company/situation and your profile for risk.

Control dilution by raising at a higher valuation

Pushing up valuation during fundraising can help control dilution of founders.? But beware of going too high.

This one is also kind of a no-brainer that the higher the valuation you get from investors in each round of funding, the higher the price is per share thus cash invested in the company at lower rates of dilution.

One of the best ways I’ve seen this executed in early rounds of funding is to raise a SAFE instead of a priced round to essentially push out when the value gets set for the purchase price of equity. There’s plenty of nuances here but this one is pretty obvious. Higher price per share = less dilution for the same amount of money invested in the company.

This is easier said than done in todays funding environment. That said, the more trendy your start up is (cough… AI) and the more traction you have tends to lead to more competitive deals. That’s when the company has more leverage to possibly push prices up. Happy hunting!

Tradeoffs: Raising money at higher rates means a) higher expectations from your investors to return bigger outcomes which can produce various amounts of higher stress for you b) higher strike price for incoming employees thus creating lower value for new employees which can make it harder to hire talented employees and can, in some cases, lead to complicated tax/risk questions for employees when it comes to exercising options and c) it can price you out of potential acquiring companies who either don’t have the budget to buy you over your most recent valuation and don’t want to have to fight your board in the acquisition process who will not want to take a loss on their investment or have to go through a much more rigorous approval process (like getting their board’s approval) on a transaction to buy the company.

• Side tip 1: Most acquiring companies seem to have a level they can buy companies at where they don’t need deep approval and revenue multiples are negligible to the deal terms and that seems to currently be in the $200-300 million range for large public companies. So valuations under that likely don’t carry the “priced out of acquisitions” risk
• Side tip 2: Your ability to raise at higher valuations is fully based on the market competition for your deal. If you only have one investor who is offering to invest at a given price and you think your company is worth more, tough shit, you’re wrong. If you have many, you have more power to negotiate.

Part 1

Part 3

Part 4

Part 5