Equity Dilution Happens Fast – Tips for Founders

Consider a startup with co-founders that have a  40%, 30%, 15%, 15% split at formation.

How much do you think the 40% and 15% founders will be left with once they get to their first priced round?

TL;DR – it’s less than you think!

The first dilution typically happens very shortly after formation when the company sets up an option pool to incentivize employees and advisors to join the startup.

Between then and a priced round, the company will likely raise capital using some form of instrument – typically a Convertible Note or SAFE.

Notes & SAFEs are IOUs and don’t show up on the cap table just yet – so their impact on dilution will not be apparent for a while.

The company can end up taking multiple rounds of bridge capital at different terms, and each of these instruments will one day come to life on the cap table at the priced round.

Let’s assume that our hypothetical startup created a 10% option pool & raised capital on 3 different instruments:

• Convertible Note: $6M cap, 25% discount, 10% interest
• Convertible Note: $8M cap, 15% discount, 10% interest
• Priced Round: $10M pre-money, $2M invested, 15% expanded post-money option pool.

Many founders are surprised by how much they get diluted in this scenario.

In the above example, the founder that started with 40% is down to 22.9% and the founder that started with 15% gets down to 8.6%.

And the company just got started. There are more option pools to be created, more capital to be raised.

At TWO12, we bring clarity and precision to a startup’s legal & economic ownership. Lawyers and excel spreadsheets provide a rough approximation at best. Founders, employees, and investors deserve better.

But not only can you determine the accurate state of the cap table at the present moment – with TWO12 you can tell a story to your investors and stakeholders about how your cap table evolved to where it is today, model out where you think it might be headed in the future, and save/selectively share those models with select participants on the cap table.

If you’re worried about dilution, give our 14-day demo a try and see where your equity stake is headed. Easily share those models with your cofounders to kick start a conversation and drive business strategy.

Find out how at https://two12.co, or reach us at hello@two12.co.