Assuming that the founders have a very high leverage, what are some tips for founders to avoid dilution?

At a practical level, if you want to absolutely minimize dilution in 2018 and you are “hot” (and thus have high leverage) … do not raise money from VCs.

In 2018, there are many other ways if you are hot to raise at a higher price, and also, to sell less. Most VCs want not only a practical price, but they usually also want to own a significant amount (5–25%). More on why that is here: https://www.saastr.com/why-vcs-n…

But in 2018, if you are super hot, you have other options:

  • Raise money from angels that don’t care too much about price, e.g. raise $2m on a $50m valuation. No VC will do this type of deal (ownership too low), and potentially because of price. But in Silicon Valley, if you are super hot, you may find “play money” wealthy angels who will do these kind of deals. They are no longer uncommon.
  • Raise money from new funds that don’t care as much, either. Most new funds are seed funds that are very price sensitive. But some, a minority, are just about getting into hot deals. They also might do $2m on a $50m valuation, or whatever. Stage-agnostic but smaller funds will do these types of unusual deals.
  • ICO. This is getting a little harder, but it is sure is less dilutive.
  • Raise money from other, non-traditional sources of capital. Offshore sources of capital, etc. More and more folks want to invest in startups with direct returns from any individual investment often being secondary.

So if you’re hot and want to hack it, avoid South Park and Sand Hill. This doesn’t always work. But there are far more non-traditional sources of start-up capital today than there were even just a few years ago.

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Published on March 18, 2018

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