Is it true that VCs prefer startups with more than one founder because it allows them to chew equity faster than they would able to do otherwise?

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JASON LEMKIN

Well, of course not.

But let me reframe the question: VCs do prefer founders that are generous with equity in the early days. Especially, before they invest. (later, they don’t like it as much).

It de-risks the VC’s investment, and the VC doesn’t have to pay for the dilution.

Imagine Scenario 1:

3 founders, equity split 50/25/25, no pool

vs Scenario 2:

3 founders + 5 initial employees, equity split 40/20/20/10% for 5 others + 10% for pool

If I can invest in the second scenario, at the same price, and all other things are constant … it’s not only a better financial deal at the margin (because the dilution for the 5 employees plus the 10% pool has already been ‘taken’), but much more importantly, it shows me you are willing to take the dilution to go big.

Many founders aren’t. If you aren’t building a Unicorn, it may not make logical sense to give out a lot of equity. Yes, venture equity is very dilutive. But man, employee equity is also highly dilutive. Between multiple pools, multiple management teams, etc. … you’ll probably end up giving up 30% fully-diluted to your employees over time, maybe more.

So when I see you logically using equity, in a traditional pattern, to incent greatness … I know at some level, the founders believe owning 20%-40% of Something Big is better than 100% of Something Small.

That gives me more comfort investing.

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Published on March 4, 2017
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