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?

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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