Founders hate dilution. They are jealous of the equity in the company, because they believe in the vision and the opportunity. On one hand, the founders don’t want to give up equity. On the other hand, they typically need capital to grow the business.
Investors are also equity driven. That’s why there is tension in every single fundraising.
The other truth about building companies is that fundraising is rarely quick. More often than not, is quite painful. Regardless of how great the company is, a large chunk of CEO’s time goes into raising capital.
Once the round comes together, though, there is typically more capital available. In other words: every start of the round is slow and difficult, but the the second half of the round is often faster and easier. Rounds that come together tend to be oversubscribed. That is, once you are done, more capital shows up.
This dynamic presents a dilemma to the founders: Should we raise more capital, when we can? First, recognize that you are lucky to even have the option. Now, lets look at difference scenarios to see what makes sense.
Scenario A: You can raise more capital without incremental dilution.
If you are able to add more capital by having the same amount of dilution, the answer is easy — raise more. If you aren’t giving up any more of the company, but get more cash and longer runway, take it.
How is that even possible? You will need to negotiate with investors and, adjust pre/post money valuation, size of the option pool and possibly other things in such a way that you, as a founder, have the same amount of ownership. Typically, it would mean that investors would end up owning a bit less of the company or option pool would be smaller. That is, someone else will assume the dilution.
Scenario B: You can raise more capital but get diluted more.
It is rare that investors would agree to a deal where you can get more capital in without sharing in dilution. The question is then, should you as a a founder, agree to more dilution now and get more capital in the door, or roll the dice, put yourself on a tighter time line but keep more of the company now?
The answer is, it depends but you should at least seriously consider raising more capital if it is available. You want to give yourself a longer runway. If you run out of money, you will have to restart the whole fundraising process. Remember — it is painful.
The capital is available now, and you don’t know if it is going to be available later. If you have a shorter runway, you may run out of money sooner than you expected, and will need a bridge or an extension financing. That financing is likely to be more dilutive than the current financing. You won’t get the step up in the valuation you want, because you aren’t in control when you are out of cash.
Bet on future value.
You can make up for the incremental dilution you encounter now with a bigger valuation in the future. That is, whatever points you lost now, you can make up by creating greater value, because you will have longer runway before the next financing.
As the private capital is going through turmoil, raising more capital when it is available makes even more sense. You don’t know how long the down cycle will last. You don’t know if you will hit all your sales projections. You don’t know if the steep growth you projected is realistic.
In a down market things most companies grow slower, and take even longer. Given that Series A crunch was already a topic of conversation for years, it makes sense to raise more capital and give yourself longer runway. If you are lucky and the capital is available, take it.
Resources : Entrepreneur.com