Why Dilution Sneaks Up On Some Startup Founders
October 18, 2011
Can you imagine a scenario in which four founders of a successful startup company sell their business for more than $30 million — but walk away with an average of just $20,000 for each year they ran the company?
Sounds crazy, right? But it’s more common than you think, writes entrepreneur turned venture capitalist Mark Suster on his blog, Both Sides of the Table.
The reason is dilution.
And, as Suster points out, if startup founders don’t understand how it works or fail to pay attention to their ownership percentage as they go through each investment round, they could end up receiving far less cash at exit than they were anticipating.
Founders’ goals, Suster writes, should be to have the value of their startup go up by enough that their smaller ownership of a now much larger business actually increases their personal value. To help bring some clarity to the issue, Suster includes a great infographic in his post and breaks down the things startup founders should look for when they go through each investment round.
To read the full post, click here.
Photo by: Jonathan Lin