Chapter 1 - HR Matters
IN THIS LESSON
Don’t be a Hero: You Can’t Raise Money, Save the World, & Build a Successful Company
Founders & Co-Founders & Founding “Team” Members:
Everything That Can Will Go Wrong
In this course, we have had extensive discussions about securing more funding through your next equity round. And we’ve discussed how much to give up in a round. You may be fine with it and your newer investors may be happy with what you have done in giving up more equity. However, your long-time “legacy” investors might have a problem with how much you are giving away. Others who may also have an issue with you are your co-founders.
Giving away equity of your company to more people affects everyone on the cap table. A co-founder, who has 25% of the company, may not want to see their stake diluted in any significant way. Remember that giving away an equity stake is through dilution; it’s not a direct sale of equity in your company.
It’s not all about you. You may have structured the company in such a way that you have control of the board and the vote, but it doesn’t mean that investors and your team don’t have influence, power, and the right to a genuine reaction that may be different from what you’d want.
The following are three things we recommend that you do to minimize this kind of situation:
Keep everyone in the loop: It is best practice to ensure that you keep your investors and your team in the loop with the terms you are seeking early on. This is good to do even before you start to get investors interested in you and your company.
Go back to investors and proactively communicate a change: Intelligent people realize that things change; situations change; people change. But rather than just giving away extra equity and silently or secretly diluting other people’s stakes more than expected, the honourable thing to do – something that will cultivate trust with your investors as well as your team – is to go back to them and explain if investors ask for something dramatically different than you laid out.
Educate investors and your team on your plan to give up equity: Make sure you educate others with what you know about how much to give up and how much you need to reach your goals. An explanation will do wonders to foster trust.
It should be mentioned that we are talking about dilution in terms of percentage of ownership of the company. We’re not talking about the value of the shares. Of course, if you raise money at continuously higher valuations, the value of the existing shares will increase over time, benefitting co-founders and early investors. But it’s better that you develop your communication plan to communicate to legacy investors and your team based on a stable valuation that is realistic, not on unsubstantiated hopes for higher valuations in the future to offset the dilution of existing equity.