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THE PROBLEM OF DILUTION
Most founders start out owning their company.
But to grow as quickly as possible, you’ll need investment, and to secure the capital you’ll need, your investors will want to own a part of your company.
The faster you grow, the greater your burn rate becomes, and the more capital you’ll need. You move from pre-Seed to Seed to Series A, but with every cash injection, you’re forced to give up another slice of your company. Offer too little, and the investment dries up — offer too much, and you’ll soon find yourself without a share in your own company.
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MORE IDEAS ON THIS
ANTI-DILUTION PRACTICES
This apparent horror story leads many founders to take staunch anti-dilution measures. But dilution serves a purpose: to attract skilled people and resources to your startup.
Whether it’s incentivizing a respected VC with a sizeable ownership stake, or luring top talent wit...
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EQUITY AND VALUATION
The only real valuation of a company is whatever someone is willing to pay for it, and a VC will pay huge amounts if they think you’ll be worth a whole lot more in the future.
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THE EQUITY EQUATION
Investment decisions can become incredibly complicated, and in the case of successful startups, minute changes to ownership stakes can equate to millions of dollars. Thankfully, there’s a simple rule of thumb we can use to work out whether or not we think an investment opportunity is worthwhile.
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PRE-MONEY AND POST-MONEY VALUATION
Let’s assume both you and your investor have valued your early-stage startup at $100,000. Your investor is willing to contribute $25,000 to fund the growth of your company. How much equity should they get?
- If that $100,000 is a pre-money valuation, the company is valued at $100,000 bef...
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IDEAS CURATED BY
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Other curated ideas on this topic:
How stock markets work
- A stock market is simply a place where buyers and sellers meet to sell shares.
- A share is a divided-up unit of the value of a company.
- Shares exist to boost profits of firms to turn a business into a financial success.
- Enter a stock market:...
A fund explained
- A fund is simply another way to buy shares.
- Instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market.
- Each fund is mad...
Your belief in the long run isn't enough
Your investors, coworkers, spouses and friends have to sign up for the ride. Being right is one thing. But you also need to be able to convince those whose support you rely on.
An investment manager who loses 40% can tell his investors, "We're in this for the long run,...
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