It feels like a lot, of course, because you know you will have a lot more rounds of funding down the line – and if you have to sell 23% every time you raise money, there will be nothing left very quickly.
At least it feels that way because your brain is doing subtraction. They think if you start at 100% and lose 23% four times, you will go down to 8%.
In reality, that number is closer to 35%.
How do you lose 23% four times and still own 35%?
This is because dilution is not subtraction. Its multiplication. Every time you sell 23% of your business, multiply everyone’s ownership by (1 minus 23%).
And since my possessions keep dwindling after each round, it’s always less how much I’m losing from an absolute percentage standpoint.
After one round I own 77.00%.
If I get thinned another 23%, I own 77% x (1-23%) which is 59.29%.
If I get thinned another 23%, I own 59.29% x (1-23%) which is 45.65%.
If I dilute another 23%, I own 45.65% x (1-23%) which is 35.15%.
Let’s say the prizes I get for these rounds are worse – a lot worse – and the amount of dilution I take each round is not 23%, but 30%. The first round costs 3mm with a post-money rating of 10mm, the Series A 9mm with a post-money rating of 30mm, and so on.
Four rounds later, you’re 24.1% owned, which is less than the 35% you had, but it’s still kind of in the stadium. Think about it for a moment: the four additional dilutions of 7% will only cost you a total of 11%.
Consider the extra padding it could have bought you.
Imagine each round being three times the last price – how much did the additional 7% dilution actually buy you in cash each round?
On the starting round with the 10mm post money rating, the 7% bought you an additional $ 700,000, going from a 2.3mm round to a 3mm round. That’s 30% more cash.
In Series A that’s 2.1mm, as the lap has increased from 6.9mm to 9mm. The 27mm series B increased by $ 20.7, and for the series C you pinned 18.9mm for your 62.1mm round and brought it up to 90mm.
After four rounds, you could either have raised 92mm and owned 35% of the company, or raised 120mm and owned 24% of the company.
There are no certainties in the startup world, of course, but if you’ve just taken that extra 28mm and put it in the bank for a rainy day, there’s a good chance you will fend off that chance and the whole thing will explode and turn into one Zero – and this insurance policy seems pretty worth it after four rounds for 11%.
The trippy math part of this is that the extra 28mm you accumulated over time for that extra dilution is like adding it to the monetary value at just over 250mm – because most Of the money that came in, the US dollar purchase amount comes much later when the stock prices are higher.
Not convinced yet?
What if I actually started looking at your wealth? on paper given these reviews?