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> I imagine if a company becomes enormous, I'd care less about whether my net worth was $200m or $250m as a founder

As an ex-founder I never understood why people make this argument because it's completely symmetric. I.e. I could rephrase it as "I imagine if a company becomes enormous, I'd care less whether my outcome was $200m or $250m as a VC"

I agree with the advice in the article but would phrase it slightly differently -- work hard to structure your company such that you can get away with raising as much as you need and still give away only 10%-15% each round. (Or, yet another way to put it, build a company so successful that you can dictate the terms)

People do make that symmetric argument, actually :). A lot of people in the ecosystem, both founders and VCs, will say things like "investors shouldn't be price sensitive, because if you've found the next Uber, it doesn't matter if you get in at a $10m cap or a $15m cap."

What is your response to that argument?

If you've found the next Uber, that's exactly when it matters.

To be completely honest, I don't really view things from that frame. I think more about 1) how much does this company need to execute on their plans? and 2) what would a fair valuation be given their current progress and market comps? If that's 10% dilution then that's fine. If that's 25-30% dilution that's also fine -- but more dilution would be scary. Usually it's 20-25% dilution -- e.g. a fair pre-valuation might be $6m, and the company wants to raise $1.5m or $2m for 18 months to do X, Y, and Z.

If the valuation feels unreasonably high then I'll try to negotiate, or I'll just pass. If the valuation is low and results in too much dilution, then I'll try to figure out with the founder if they can make progress with less money/dilution, or I'll just pass -- because overdiluting sucks for the founder and will also eventually suck for me as an investor by capping the upside.

I think this framing works for the founder, too: if you need $X for your near term plans, and you're getting a fair valuation that doesn't overdilute you, then that's good. If the valuation is unfairly low, try to find other options. If it's unreasonably high, then that's okay if you are good with cash management -- but be mindful that the higher your current valuation, the higher investors' expectations will be for your next round.

I agree. Ironically, this was the advice we got while going through YC (yours, not Sam's.)

Specifically: don't worry about valuation because success is binary. You either make enough money that you don't care too much about percentage or you make zero dollars in which case you don't care about percentage.

The idea of constraints helping to focus a team sounds true, as long as people have enough to not worry about money. Note that this advice comes from Sam, who literally got scurvy from eating too much Ramen while a founder of Loopt.

Does anyone else find this binary view of success to be... sad? I guess you could say that if your goal isn't "Uber or bust" then don't take external capital. Is there really no funding available for companies that just want to make relatively safe, modest bets and deliver relatively safe, modest returns?

1) There are some new funds popping up, like indie.vc, which don't subscribe to the "Uber or bust" model. Some accelerators, like 500 Startups, are also in that camp.

2) If you can bootstrap to enough revenue, you can try bank loans or things like http://www.saas-capital.com/

3) Unfortunately, the numbers don't work out for VCs if your goal isn't "$1b+ or bust." Almost all companies will exit for much, much less than $1b, but if there's no chance of $1b+ then there's basically no chance that a company will product very meaningful returns for its investors.

I don't understand 3)

From the VC's point of view how is a 5% chance of a $200m exit different from a 1% chance of a $1b exit? (etc.)

There's little difference between those, but usually what VCs are comparing are things that are more like 2% chance at $1b vs 2% chance at $200m -- and then there's a big difference.

Also, if one company is a 5% chance chance at $200m but 0% chance of being worth more than that, while another company is a 1% chance of $1b, the second company might still be a better investment because it's probably 1% chance of $1b AND a 5% chance of $200m if it doesn't go all the way to $1b.

Assuming that those numbers are known precisely, the 5%/$200M is clearly the better option. But in practice it's basically impossible to distinguish a 1% success rate business from a 5% success rate business. On the other hand, it's pretty doable to estimate best-case outcomes based on the size of the market being addressed and some assumptions about margins and market share derived from the business model.

You don't have to do Uber or bust, but don't ask for venture money without going for venture returns.

I do agree that there is a market opportunity to fund $50m/year businesses, but that's not what VCs are for.

VCs: Invest in 100 companies, 90 fail, 5 return capital, 3 return 10x, 2 return 100x | 2.35x return on capital over a 10 year period (hopefully)

Index fund: 6% yearly return | 1.79x return on capital over 10 year period

Traditional small business loans average 6-9% APR and have a higher failure rate than an index fund but lower than an index fund. Unfortunately, for startups, they require collateral and/or historical financials.

I never understood this logic. Investors want unicorns but it's not like they're going to hate you for only giving them a 5x ROI.

Most startups either fail or become small businesses. Investors are giving you money to fund a business that you own. Depending on the terms you can, and should, use that money for whatever you want.

Its the investors problem if 5x returns aren't good enough, not yours. Does the bank call you to complain that your mortgage interest rate is too low? No. They gave you the loan with what they thought was reasonable terms at the time. It's not your fault they gave you the money too easily.

You should be focused 100% on building a successful sustainable business. Investors can fuck right off if they push for risks that could turn their 5x return into 0.

That requires that you have board control. If investors control the board and you tell them to fuck right off, you will quickly find yourself out of a job.

Board control isn't the problem at seed. You'll usually have board control. But if you need another round of funding, the investors control the company.

If your seed investors are "name brand", and they pass and say, "Ah yes, they're very nice guys. Wonderful conscience, very punctual. Unfortunately I can't follow on, my capital's already allocated. I wish them luck.", you'd better have a plan for profitability.

VCs can't reasonably invest in a company where their upside is capped at a 5x return, because they need the long tail, 20x-100x returns to pay for all the 0x returns in the portfolio.

No, a VC doesn't hate you at the end of the game if they get paid 5x. That's different than answering the question "Will they invest for a promise of a 5x return?"

Sad, yes, but that's the world we live in. There's really no such thing as a "safe, modest bet" - that lifestyle business that provides you a good living now will cease to provide you a good living soon after a big competitor decides to move into your space. Similarly, even working for the big competitor isn't all that safe: you could be laid off because your manager doesn't like you, or because your manager's manager doesn't like your manager, or because product priorities shifted around, or because you're suddenly the scapegoat for your company's sexual harassment culture, or because your company hit a revenue speedbump, or simply because shareholders & upper management get greedy.

Binary success ultimately comes from the customer: from their perspective, either the product satisfies their need or it doesn't. As soon as some other product satisfies their need better, they'll switch. And since customers talk to one another and largely like the same things, they tend to do so en-masse, and even $multi-billion giants can find their market evaporates in the span of a couple years.

Lighter Capital will give growth capital to tech companies without expecting 10x returns or taking any equity.

I will never take startup advice from investors. They care about your company and their money, not you.

Of course they're going to tell you not to worry about giving more of the company away, they don't care who owns it. More money flying around is almost invariably a good thing for early investors.

You don't really need advice about funding from anyone, just look at some successful companies and see what they did. Funding is one of the few aspects where you can mimic your startup idols because it's public info.

The fact is, all the biggest unicorns had enough promise and brains behind them to retain majority ownership, or at least full control well into billion dollar territory. If you're good enough investors will be practically begging to give you their money.

Yeah, so fuck the advice from investors. Make sure you keep as much ownership and control over your company as possible until it's sending people to the moon.

> You don't really need advice about funding from anyone, just look at some successful companies and see what they did. Funding is one of the few aspects where you can mimic your startup idols because it's public info.

Survivorship bias, anyone? You can look backwards at all the success stories. That tells less than 1% of the story, though. What about all the failed companies that did the same thing as the successes? What about all the factors that were irrelevant to success, yet apparent in the success stories?

> The fact is, all the biggest unicorns had enough promise and brains behind them to retain majority ownership

Isn't that pretty close to saying, "All the successful unicorns had apparent qualities of successful unicorns along the way"? How do I become tall? Ensure the top of your head is far away from your feet.

One big problem with dilution isn't that you make less money but that you lose control of the company. And poor decisions by investors are a good contender for the #1 thing killing companies. For a VC this is yet another bet which they don't quite understand or care about, compared to a founder for whom it's the bet, and they understand it and care about it much more. Founders being in control is better than VCs being in control.

We are VC/early stage investors in New Zealand, and give the advice constantly to raise as little as possible at each stage - and plan to get back to cash-flow positive if another round does not turn up. It's a function of our lean investor ecosystem here, but it also creates companies that treasure every dollar and are even more attractive for investors.

I think that's a great mindset to have and to encourage. My main argument is that "as little as possible" -- especially in Silicon Valley -- is usually much closer to 20% than 10% dilution at seed. E.g. an FTE salary might be $125k-150k/yr, and selling 10% at a $5m cap gives you enough capital for 3-4 people for a year, which is a very small team and very little time to make enough progress to raise a Series A.

Sure. Our overheads are a lot lower here - free healthcare, Xero for accounting and a simple tax system makes things easy, low rent, reasonable salaries (but a better standard of living) and so on. And no capital gains tax.

(Hey Leo)

I agree, this is hard to do. Because most investors triangulate on 15-25% per round, and use the amount of money you expect to raise as a way to back into a valuation.

As a founder, the best way to do this in a seed round would be to raise (all or most of) your seed round from Angels, who are more likely to sign off on a note / safe at a specific cap without knowing the total amount raised, and then you can triangulate on 10%.

It's worth noting that this game is even harder outside of the valley, because while operating costs are significantly lower, so are valuations, and most companies will bump into minimum cash needs for 12-18 months.

Sam made a good point: running out of money is way worse than optimizing for your cap table.

Let me make a second point: Optimizing for success is way more important than optimizing your cap table. In other words: If you believe a specific investor meaningfully adds to the probability of a success state for your company, then its probably a good bet even if you are not happy about the dilution.

In order of what you should care about:

1. Not running out of money.

2. Finding people who can be value-add and help you prevent mistakes and find success.

...

3. Dilution (within reason).

Also, you can always recap founders in later stages. It happens.

That's a great way to prioritize those three things. Existential risk is always #1.

To me it's about the control more than it's about the money. If preferred shares got half the voting rights as common then the difference between a 10% seed and a 15% seed isn't as bad, but after accelerator / angel takes 7%, seed takes 15% and possible bridge + series A takes 30% you're down to raising a series B and admitting that you're no longer in control of the company.

> I'd rather have 60% of a small exit than 80% of a $0 exit.

60% is one funding deal away from becoming a minority stake, while 80% leaves room to do another deal while still maintaining control. Money is not the only concern here.

But he's talking about exit and not control after another round.

I'm not sure why you think they are different things. Without control, you cannot direct the company towards an exit. Or away from a bad exit. Or away from another deal that will further dilute your stake. You have to trust the majority holders to do all those things.

Maybe I've just been around for too many decades, and seen too many shady deals proposed. But my trust comes slowly -- control issues come first in my mind.

Well, they are literally different things and yeah, I'm caught up on that. I'm trying to figure this out too.

I've known of founders who wouldn't take a deal because they liked being, to use Zuckerberg's honorific, CEO, bitch. And then they rode that into the ground.

I think you're saying they're two forms of the same thing. That's true but they're not two reversible forms. Moreover, there is no control after exit.

So the point is that taking a little less at a concrete exit might be worth more than taking a little more of a sleigh ride.

My first reaction was "wow my company must have sucked." And granted on many levels we did (and were never close to being the hottest company in the world), but if I fought for 10% seed dilution I would have been laughed out of the room.

Maybe it's different if you're a shit-hot YC company, but man. I thought you were successful if you stayed below 20% at seed.

Yeah, my ballpark estimate from my portfolio (~50 investments in my fund + ~20 personal angel investments) is that 20-25% dilution is common at seed stage. Occasionally it's 15%, which is great. Occasionally you also see 30+%, and that's pretty bad.

Would it possible to provide more granular data(anonymized, of course)? What was the mean, median etc dilution for your seed investments? And same for when your portfolio companies go on to raise a Series A? Thanks!

This free report is an excellent resource on average dilution at each round: https://www.capshare.com/blog/dilution-101-startup-guide-equ...