over the last A couple of months ago I spoke with a number of early-stage investors — whether angels or VCs — who seemed proud of their ability to take 25-30% of a startup’s equity in an early-stage funding round. In one case, an angel investor apologized for “being able to convince the founder to give him a 41% stake.” I was reminded of this several times when I was in Oslo this week, speaking with a number of players across the startup ecosystem.
TL;DR: If you’re reading the above and wishing you too could control this level of ownership stake in a startup, I have some bad news for you: You’re short-sighted, and you’re hindering the startup, the founders, and your chances of success.
Founding a startup is difficult. This means that investors should help, not create a situation in which startup founders are discouraged and will not be adequately compensated for their hard work in the event of an exit. This is exactly what will happen if investors acquire too many startups, too early.
To explain why investors who pat themselves on the back in early rounds introduce a poison pill into a startup’s capital tables, let’s take a look at what can happen to a company that dilutes 30% in each funding round.
Why the “poison pill”? Because diluting founders too much practically guarantees that the company will not give a significant return on investment; If it needs to raise additional funding in the future, future investors will likely reject the lack of remaining ownership of the founders.