Optimizing the 3 factors in an early fund raise

Recently, I posted encouraging founders to raise more money than less if possible at an early stage and not excessively worry about a few % of additional equity dilution. I believe this point needs more clarity and should extend this further. And while extending this, I want to also include the perspective of a VC so founders get the context clearly.

Founders have more room than VCs

A simple example: Let's say in an early?stage deal, founders own 70% after the round and a specific VC will own 10% ( rest 20% is by others). Now, that VC wants to get to 15%- why? we will discuss this next. The founders also like that VC, so want them onboard. One way to do this is that founders agree to dilute by further 2.5%, and ask VC to reduce their aspirations by 2.5%-> Founders 67.5%, VC 12.5%.?

However, another way to think is in %s as founders have a larger denominator, they can probably give away more. If founders reduce it to 66%, and VC keep 14%-> founders have reduced 4 out of 70 (~6%) and VC has reduced 1 out 15 (~7%). This is more likely to be an agreeable solution.?

In most early stage deals, founders have 5-6X more equity than VC, hence more room.?

Limits for VCs and founders: imaginary or real

For founders- I wrote an article on minimum equity founders should own to give some perspective. Beyond a point, founders should be careful diluting at an early stage. But, I have seen founders create imaginary limits for the dilution,?and get emotional about?it. A lot of it is governed by the market so there isn't a true science to it but only business sense. In any case, the first step of negotiation is to keep the personalities and emotions out of it. Equity is gold, and founders should use it wisely, and raising capital and onboarding right investors is a wise decision.

Many institutional investors also have a limit, which is determined by the nature of their business, and they need to be disciplined about it. For example- if a VC firm does a few investments in a year and supports the portfolio in long term, they would like to start with a minimum equity %. It is determined by factors like fund size, investment?stage etc, and anything less than that % won't justify their involvement in the long term.?

Founders anyway should be careful involving a large institutional investor with a small equity holding, as the investor's interest may be reduced over time. If the situation comes, founders can ask VCs directly about these limits etc in their specific case and have better conversations with the right context. For example, if they want to come at a minimum of 10%, you may offer 8 or?9% but it's very difficult for them to agree to a 6%.?

So, the tricky situation is when both founders and investors are close to their "real" limits. But in my experience, that doesn't happen often.?

So, Capital vs Investor vs Dilution

These are exceptional times as well where raising money isn't as difficult. Honestly, you never know when it will end and how difficult it may become in future, so founders can make use of the macro trend. Founders need to solve for survival and capital is helpful for it. Founders pace of growth and support of the ecosystem will create far more value for them in longer term than the additional 2-3% they can negotiate now.?

Hence, I believe the priority at an early stage is:

1. First, capital. Raising more capital is better than raising less.
2. Then, right investors. If you have more options for capital, raise it from right investors. Appropriate to your stage, good chemistry etc.
3. Then, optimize dilution. If above two are similar, solve for minimum dilution

Another factor often missed is "time". How fast can you close the round? Fundraising can be distracting so a faster execution can save really valuable 1-2 months at an early stage. Closing it and moving on is good. It's helpful to give "time" some weightage as well.

Raising capital is a milestone but building business in the real thing so fundraise has to be seen in a larger context rather than minor wins.?

All the best for closing your next rounds and building a great business!