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/
Stuart
Stuart's first twenty working years were spent in the IT industry in the UK and USA. His first start-up experience with a British software company which exited twice – a trade sale in both cases. He went on to form several other IT service companies and has been directly involved in early stage companies ever since.
He has managed investment in a London based family office and has worked in an FSA regulated brokerage & fund management business investing in pre-IPO companies, particularly AIM. During this time Stuart was involved in 4 flotations and a trade sale as exits for investors.
Most recently, Stuart founded an advisory company for early stage technology businesses to enable them to grow and achieve their potential through great management, a focussed go-to-market strategy and sufficient funding to achieve their goals. This often includes hands-on involvement in the formative stage of the business.
Technologies covered include software, web-based applications & services, medical devices, cleantech, renewables, mobile telecomms and engineering.
Services include strategic planning, sales & commercialisation and capital raising (debt and/or equity).
Stuart has served as an non-executive director of a wide range of companies from start-ups to AIM listed and has also been a trustee of a charity.
Permanent link to this article: http://www.concap.cc/2011/10/dilution-to-be-avoided/
