Dilution – to be avoided?

Why is it that the earliest investors are penalised the most?

After all, they are the ones that enable a business to get off the ground, the ones prepared to take the risk and often to provide support to the management. Later investors are happy to pick up the opportunity yet would not have invested in the first place. They are generally also quite happy to invest in a manner which is detrimental to the earliest, riskiest investors. They don’t have the capital to do the ‘A’ round, but it wouldn’t be there without them.

I ask this because I’m involved with three companies right now raising new money, all of them are pre-profit but revenue generating (so at least “interesting” to our risk avoiding professional investment community). None of these companies want to accept money that is detrimental to their early investors – and in one case have simply said “no thanks”. I understand what is happening but I don’t understand why early stage investors don’t get more credit and frankly deference by so-called professional investors – many of whom have never started a business in their lives yet feel able to criticise others that do.

So if you have an interest in the effect of dilution on your equity, take a look at this post on TechCrunch:

http://techcrunch.com/2011/10/13/understanding-how-dilution-affects-you-at-a-startup/

 

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