So more power to Sam Altman’s 1 person, $1 Billion start-ups. If that’s you, great. One thing you may not have to worry then about is dilution. Because you won’t need to hire anyone, or potentially, sell any shares to investors.
But for most of us, that’s not the case 😉
Dilution will come from 6+ sources over time:
- Your first sale of equity. Most folks get the dilution here about right. “We’re selling 20% of the company for $2m”.
- SAFEs you may issue to raise extra capital. Most founders get the dilution here wrong. They sort of ignore it. Especially if they keep issuing SAFEs. The dilution can really add up.
- Later Series A, B, C, D, etc. rounds. The dilution here is usually 10%-20% each time. Most founders sort of get that, but don’t quite stack it all in their head.
- The dilution from 3-4 management teams, not just one. It’s not just 2-3 VPs with 1% each. It’s the 10-20 VPs you’ll hire on the way to IPO. Almost all of us underestimate this dilution over time.
- The dilution from re-load and evergreen grants. You’ll want to get more equity grants to your team, and you should. But founders tend not to think too much about the dilution here.
- The general 6% a year dilution from new hires overall. This is a rough rule of thumb that seems to hold pretty well.
It’s the last one most founders mis-budget for the most. The consistent dilution from new hires that doesn’t really hit the first year or two, but then as you scale, really is about 6% a year. More in some cases. Roll that across a decade … and it’s a lot of dilution.
Now all of this is part of the journey of Going Big and part of growing up, in a sense. You can’t fight it. But it’s worth not hiding from it, or ignoring it.
A few things that help mitigate dilution:
- Cut the burn rate by 20%. Most folks can actually do this without missing a beat. In the end, this alone could cut your dilution by 10%-20%. Because you won’t need as much capital.
- Sticking to a burn budget each year. An even more actionable version of the prior point. Stick to a firm cash burn rate budget for the year. Force yourself to work within that constraint. You’ll get the same output, and won’t have to sell more stock earlier to make up for going over. More here.
- Concentrate equity in those who stay. Work on vesting schedules, re-load grants, etc. that concentrate equity in your highest performers that stay. Target 85% of employee equity staying in the company.
- Have 8-10 year founder vesting with a true cliff. The most expensive dilution is the founder that checks out and quits early with a ton of stock.
- Consider 5 year vesting periods, not 4, for non-founders. This will have a material impact over time.
- Concentrate “evergreen”and second grants in your truly top performers. They end up wasted elsewhere.
- Have cliffs on second / evergreen grants, too. It won’t matter for those that stay. It will get you back the equity from those that quit.
- Make 100% sure you want to make the big, expensive SVP/CXO hires. Mishires here tend to cost you a lot of equity.
- Make sure the ROI is real when you raise more capital than you need. If VCs are banging down your door, should you raise? Maybe. Just make sure you can really deploy it, or that you truly need the safety net. If so, take it. But understand the math on how expensive dilution is.
Again, dilution is part of life. It’s part of the aging and maturation process of a start-up.
But if you can avoid even 20%-30% of it, not only will you end up much better off financially, but you’ll also probably end up with more shares to give to your top performers.
They are the ones that really deserve it. They never get enough.
And of the last few SaaS IPOs, 2 barely raised any VC capital at all. More here:
