The dilution percentages of a startup It is a very important issue, since if you do not know how you should deliver the company’s shares, you tend to stop being the main shareholder in the not too distant future and therefore have problems raising capital .
We know that your startup, just as if it were a living organism, needs nutrients to grow and develop, which, in this case, we will find in the financing obtained from the investors who have decided to bet on your great idea; However, you must be able to control the amount of nutrients that your startup will receive in each of its growth stages, since its success will depend on it and, consequently, that of its founder(s) and investors.
I will give you some recommendations to talk about the usual percentages of dilution of a startup.
Dilution percentages of a startup
What depends on the amount of financing that your startup will need in each of its growth stages?
It will depend on your requirements because not all startups are the same, nor are their financing needs identical. The only certain thing is that, within the tortuous path to obtain financing, you must have a clear vision regarding the amounts of money that will be necessary to develop and grow your product, develop your business model, increase sales, improve relationships with your customers and suppliers, identify and hire the necessary human resources for the operation and growth of the company, as well as the results you intend to obtain after obtaining the investment.
Once you manage to define these and other elements, you will have a very clear vision of your company’s need for capital.
Why is it important to define the amount of financing my startup needs?
Because, from the perspective of a founder, you will clearly know the amount of money you need, on the one hand; and, on the other, you will be aware of the destination that you must give to such funds within your startup to achieve its objectives, that is, to grow rapidly.
The foregoing is also important if we analyze it from the perspective of investors, since it will be very difficult for them to deliver amounts of money whose need does not derive from a thorough analysis and that do not have an apparent objective within your startup. Remember: “in order to obtain financing, investors must trust the growth capabilities of your startup (among other things)”.
Once the financing need of your startup has been defined: Can you request more money?
We recommend that, within the financing round in question, you do not overdo it by requesting amounts of money greater than the capital needs of your startup, as this, as we will see shortly, could mean a higher percentage of dilution of your participation.
Dilution: What is it about?
Every time you accept an investment, you are agreeing to divide the revenues of your Startup among more people. Let’s say that initially the birthday cake will be just for you, but when you invite your relatives (friends and family), friends (business angels) and known (professional investors – VC), your share of the pie is getting smaller and smaller. That is dilution.
We know you’re worried, however, relax! Dilution of a startup’s ownership percentages is a normal and much-needed part of the path to its goal.
Is there anything else you should know?
That’s how it is. Although dilution is a normal and necessary part of your startup, you should be aware of the parameters within which such dilution will be considered “normal” by the standards of the venture capital industry (where your money will most likely come from). investors).
Trying to be very brief about it, we leave you the following table in which you can observe some dilution standards according to each of the financing stages/rounds in which your startup is:
In conclusion…
Now that you know the “Usual Startup Dilution Percentages”, you should know that these are not set in stone, consequently, they may differ a bit from what your Startup cap table will look like in the future, however, We highly recommend that it not reflect the percentages of any of the subsequent rounds in a current round, as this could imply a serious problem in your ability to continue obtaining financing. If the latter is your case, don’t worry! For everything – or almost everything – there is a solution
Adriana Ovando He has 12 years of experience in the entrepreneurial ecosystem collaborating in the public and private sectors for the industry. She has a degree in International Relations from the National Autonomous University of Mexico with a Master in Business & Technology at the Collective Academy; She currently works as Manager of Public Relations and Strategic Alliances for the consulting firm and venture capital fund G2. In addition, he is in charge of the Marketing area and develops the Content Marketing strategy for G2 Consultores, G2 Momentum Capital, Corporate Venture Capital, some fintech companies, with publications in MIT Forum Mexico, El Universal, Mundo Ejecutivo, The Hour, Europe World News, among others. Previously, Adriana she has collaborated with the Federal Economy Secretariat, the National Institute of the Entrepreneur, the Technological Innovation Fund and iLab center for entrepreneurship and innovation.