Member-only story
“We should be raising a $6 million round, not $12 million,” “Randy”, my co-founder, said to me. In fact, Randy was so angry about the terms of our funding that he was threatening to quit.
“Let’s meet, so I can walk you through why we are better off with the larger amount of funding,” I said. So we arranged to meet Thursday for lunch.
I developed a spreadsheet in preparation for our meeting, so Randy could see why we were better off taking more money now instead of breaking our funding up into two rounds of $6 million. My goal wasn’t to trick Randy, but to educate Randy.
Randy seemed in disbelief as I showed him the various examples. Randy had never bothered to work through the math.
If you can skip a round of funding, you should.
The increase in the number of early stage funding rounds are designed to reduce investor risk. If the sequence is an angel round of ~$200,000, followed by a Series A of $2 million, that is then followed by a Series B of $10 million, you will be diluted at three instances.
If you assume a typical 20% dilution for each round of funding, you will be diluted to 51.2% (0.8 x0.8 x 0.8) ownership by time of your Series B. That’s a lot of dilution.
