DILUTION

Speed up your business with these expert tips on "Dilution". Analyse and discover this TIP!

In order to obtain financing, one of the possible ways is to increase capital by bringing in new investors. If you do not attend the capital increase, you may leave the founders' shareholding reduced to a tiny fraction and this is called dilution. There are several ways to prevent dilution of your shareholding in your company from occurring. Many entrepreneurs who set up a start-up are so preoccupied with raising finance for their company that they do not realise that every time there is a capital increase and new investors come in, the percentage of the company they own becomes smaller and smaller until it practically disappears.

This is what is known as dilution and you have to avoid it! When a startup makes many capital increases, if the founding partners do not come to put capital in these rounds, they are diluted, each time having a smaller and smaller percentage of the company. To prevent the founders from becoming demotivated and to avoid the feeling of not owning part of the company, it is recommended that in each round the dilution should be around 10 or 15 %.

THE TYPICAL DILUTION AMOUNT FOR EACH STAGE

1. Seed series round would be from 26%.
2. The A series of 15%.
3. B series of 11%.
4. Series C round of 8%.
5. D series from about 7%.

This does not mean that your shares are worth less because, even if you keep the same number of shares but a lower percentage, your shares can increase in price. Start with few partners (2 or 3 maximum), do not give away shares to FFF (other formulas are better). Another ideal way to reduce dilution would be not to increase capital or to set a very high valuation. But this can make it difficult to raise capital to finance the expansion of the company. Capital increases are not mandatory, there is always the possibility for a company to grow and raise revenue to finance itself organically.

Your company can grow without the need for external capital, i.e. depending on the cash generated by the company. This is a more "Lean" growth model that is nowadays known as bootstrapping (+). One example of success is Mailchimp founded by Ben Chestnut and Dan Kurzius in 2001. In some cases, over time, entrepreneurs or founders can reverse the dilution, taking back a significant percentage of their startup. CodigamesThe company, a developer of mobile apps and games and one of its acceleratees, in the sixth year has been able to buy back its shares with the profits generated by the company, providing returns on its investments and regaining control of the company.

In order for a co-founder to regain part of the company's capital, there must be a clause in the shareholders' agreement specifying this. If this was not done at the time, it is also possible to negotiate afterwards and agree a price with the investors for the repurchase of shares.

Tips to avoid dilution

HERE ARE SOME TIPS THAT CAN HELP AN ENTREPRENEUR AVOID DILUTION:

1. Establish an appropriate structure from the outset: It is important for an entrepreneur to establish an appropriate structure for his or her company from the outset. This may include creating preferred share classes or issuing stock options to employees to motivate them to work for the success of the company. (See+ TIP)
2. Be selective with investors: it is important that entrepreneurs carefully select the investors they work with. They should look for investors who not only provide capital, but also experience and expertise that can help the company grow.
3. Maintain a sustainable growth rate: Entrepreneurs may sometimes be tempted to pursue rapid and aggressive growth. However, this can lead to the issuance of new shares and thus dilution. It is important for entrepreneurs to seek sustainable and realistic growth rather than rapid short-term growth.
4. Negotiate favourable terms: it is important for entrepreneurs to negotiate favourable terms when accepting financing from investors. This may include minimum dilution terms, as well as voting and liquidation rights that protect the interests of the company.
5. Seek non-dilutive financing: entrepreneurs can look for sources of financing that do not result in dilution, such as loans or revenue financing. This can help the company avoid issuing new shares and thus avoid dilution.

In general, Entrepreneurs should be careful when accepting financing and work to establish an appropriate structure from the outset to avoid unnecessary dilution.