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Early stage founders often need to make time-sensitive fundraising decisions to propel their companies forward, yet they'll freely admit that they rarely understand the long-term implications of their decisions.
We spoke with founders, investors and advisors to hear their tips for making sound fundraising decisions that you can use to benchmark your own experience. At the end of this article, you'll find tables that show how founders are diluted over the long term in different scenarios.
We talked to founders and industry experts about equity dilution and its effects on early stage startups. Here’s their advice.
For many entrepreneurs, a successful fundraising round is a time to celebrate. For Ian Foley, a veteran of four startups, it's always been a time of deep reflection.
The influx of money provides room to grow. But it comes at the expense of control and room to maneuver later on. By the time he founded AcuteIQ in 2014, Foley had learned an important lesson: "Only take as much capital as you think you really need."
Figuring out how much that is, of course, is the hard part. If you raise too much, you could give away an unduly large portion of your company. If you raise too little, you risk running out of cash before you achieve the milestones needed to go back to investors again. Meanwhile, understanding the ins-and-outs of various financing instruments—convertible notes, SAFEs, equity rounds—and their long-term implications can be daunting.
So how should you go about it? Start with some good forecasting, do a fair amount of math and get help on cutting through the legalese. Here's some advice from startup founders and advisors who've done it before:
Don't raise more than you need
You're going to get conflicting advice on this, with some people telling you to raise as much money as you can. The right answer will hinge on factors like economic conditions—bull run or downturn?—and the amount of buzz with investors your startup has generated.
Looking at it from a dilution perspective, the answer is clear: take as little outside capital as you can get away with. The money you raise early on, "is going to be the most expensive money you ever take," says David Van Horne, a partner in the technology practice at law firm Goodwin Procter.
Your initial backers are getting equity at a time when your company has the least value, so each dollar invested buys a proportionally larger stake. That's true even when you use an investment vehicle like a convertible note or a SAFE (which stands for simple agreement for future equity), both of which defer a decision about how much equity investors will get to a later date.
To be sure, …