Equity is the prize.

It’s what you can cash in after years of blood, sweat, and tears.

It’s what can give you financial freedom and pays for your children’s college education.

It’s what motivates, aligns, and engages your employees, advisors, and investors.

But strangely… it’s also what you have to spend to get to the finish line.

SO SPEND (sell) IT WISELY!!!

The problem is… most founders do not know how much of their equity they are selling.

They just blindly fire away ‘simple’ financial vehicles like SAFEs or convertible notes without actually knowing how those notes will convert and impact the dilution of their prize in the future.

These instruments are very commonly used, but rarely fully understood.

And unfortunately founders are frequently surprised at the amount of dilution they suffer in a priced round when these instruments convert.

At TWO12 we witness this firsthand when we onboard our customers… It is not uncommon for a founder to be shocked to know how little of their company they actually own.

And unfortunately, it just gets worse from there.

That’s because the equity recorded on your cap table acts as both the reward and fuel for your business.

So if all of a sudden you have less equity than you were expecting… your potential prize has shrunk along with your ammunition.

Founders are then less motivated, they have less resources to attract employees, advisors, and investors… and next thing you know the doors are shut and the dream dies.

Let’s zoom out and understand why this is happening.

Why do founders misallocate their equity?

Because startup finance and venture financing terms are actually very complicated!

In fact, one of our investors Anand Rao was a titan in the private equity world – he told us that the terms in venture capital are WAY more complicated than private equity. 

If you are reading this and don’t fully understand how this black magic works – don’t worry, you are not alone. 

Founder confusion is common and arises because early stage investors generally don’t receive equity at the time of investment. 

What the investor is buying is the ability to convert to a shareholder on your cap table in the future.

These conversion terms can be quite complicated, and they get even worse as they are stacked on top of each other… and convert in unexpected ways. 

This can leave you owning much less of your company than you anticipate.

But the good news is that there is an easy solution.

How to avoid equity dilution disasters 

Run dilution & exit models.

Even if you don’t understand exactly how these Convertible Notes/SAFEs work… 

or more specifically how they work together – this is where the real danger lies…

you can still model them out by plugging numbers into a calculator and seeing the results for yourself under different scenarios.

(BTW – this will cost you thousands of dollars to do through a lawyer and they might screw it up.) 

The best practice is to measure twice (or three times!) and cut once – eg, plug in 2 or 3 different future priced round numbers and see what the dilutionary impact will be under bad/good/great scenarios. 

I bet you’ll be shocked at how wildly different the numbers are than you were expecting.

The problem with competing dilution & exit models

They are expensive and hard to use.

You generally have to pay thousands if not tens of thousands of dollars to run multiple models on multiple rounds.

And when you do you have a three separate UI you have to learn, one for the cap table, one for the dilution modeling, and one for the exit modeling (we’ll talk in a future post about using exit models to pitch investors & recruit better talent for less). 

It’s so hard that an entire team of MBA students were unable to figure out how to use a competing platform’s modeling capabilities. 

How TWO12 helps your maximize your equity

We regularly have customers switching to us because the competitors’ models were putting out crazy incorrect numbers, or the founders simply couldn’t figure out how to use them.

With TWO12 you get Unlimited Dilution & Exit modeling (that’s easy to use and just works!) included with our $240/year cap table.

Book a demo of our dilution & exit modeling today: https://two12.co/learn_more/

“Modeling on TWO12 optimized my current raise and my plans for future raises.”

Justin Wolff
Founder & CEO JunkTheory INC

How modeling on TWO12 works

It’s the same straightforward, point and click UI you use for the cap table… 

Simply click + Add Simulation: 

Then + Add

Select Priced:

Enter some info:

And BOOM – we’re in business:

Simulations can be edited, cloned, viewed as different individuals on the cap table, and shared when ready:

Selling equity wisely is a tough balancing act. You need to sell enough that you can get your startup going… but not so much that you run out of ammo & fuel before you get to the finish line.

If you want to walk the tightrope of properly you need to be informed. 

Our software does the heavy lifting for you – providing you with the information you need to make better decisions and maximize your startups biggest asset: your equity.

Book a demo of our dilution & exit modeling today: https://two12.co/learn_more/

–Dustin Byington Co-Founder & CEO of TWO12

PS > Guide to Priced Round Terms Webinar

If you have any questions on the topics of priced round terms or term sheet negotiations we’ll be hosting a webinar on this topic soon, please email us at hello@two12.co to be notified. 

About Dustin Byington

About TWO12

Unlimited $240/year Cap Table

Fast 409A

Real-Time Fund Administration