One thing founders get quite a bit wrong is they underestimate just how much dilution they’ll see over time — as will the seed and earlier investors, who experience just about the same dilution. 

They sort of, kind of, get the dilution per round right, but even that they might understate if they use SAFEs, etc.  And they almost always underestimate the constant annual dilution from new hires and evergreen grants to existing hires.

Roughly, the average venture-backed startup experiences about 12% dilution a year:

– Roughly 6% from new hires / pool
– Roughly 6% from fundraising

This effectively doubles the price of any seed investment from its nominal valuation. And often cuts the nominal ownership of early employees in half over time, too.

Every startup is different, every market is different, and competition can be intense.  And yes, some VC rounds will be more dilutive than this, and some will raise fewer rounds.  But it sort of, kind of, averages out to about 6% or so a year in investment dilution, and 6% or so a year in option pool dilution.

But most founders look back and wish they’d had a lower dilution profile:

🥵The burn didn’t need to be as high
🎣 Equity wasted on poor VP choices
👫 Fewer, better hires would have performed just as well

Raising too little is a mistake. In fact, raise 20-25% more than you planned in each round. That buffer will often save your arse.  But you don’t have to spend it all. Maybe just spend half.

Very few founders look back and say they should have burned as much capital as they did. Some do. But very few.

Dilution is part of start-up life.  You can’t avoid it in most cases and go big :).  But a few actionable ideas:

  • Consider 5-year vesting.  It’s becoming more and more standard.
  • Concentrate evergreen grants in your top performers.  You’ll ultimately regret giving not enough equity to your top performers, and too much to the mediocre.  The ones that really move the needle always deserve more equity.  The rest deserve less.
  • Skipping one VC round can have an epic impact.  You will suffer so, so much less dilution this way.  Skip a round.  More on that here.
  • Being just a bit more capital-efficient can really minimize the dilution per round, too.  Startups that are inefficient tend to sell more in each round.  Because they need it.  Startups burning little often can sell just 3%-5% in a later round.  One burning a ton often have to sell 15%+ even in a late-stage round.

At true scale, once you are past fundraising, you’ll want to aim for ~3% dilution a year from equity grants. 

That’s Where Datadog is … today, for example:

Salesforce targets it as a % of revenue, at 8% of revenue:

A related post here with more data on VC round dilution here:

Carta: The Actual, Real Dilution from Series A, B, C and D Rounds

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