The Value of Skipping a Financing Round

A topic that’s been mentioned several times recently is the value of “skipping” a financing round. Generally, the idea is that every time an entrepreneur raises money, their equity is diluted, so “skipping” a round is basically achieving a greater revenue/user/valuation milestone without raising money in the interim.

Let’s look at the math for four hypothetical financing rounds assuming two co-founders each have 50% and ignoring employee equity and option pools:

• Seed Round – Raise $1 million at a $3 million pre and sell 25% of the business
  Entrepreneurs – Diluted from 50% to 37.5%
• Series A – Raise $5 million at a $15 million pre and sell 25% of the business
  Entrepreneurs – Diluted from 37.5% to 28.1%
• Series B – Raise $15 million at a $45 million pre and sell 25% of the business
  Entrepreneurs – Diluted from 28.1% to 21.1%
• Series C – Raise $50 million at a $150 million pre and sell 25% of the business
  Entrepreneurs – Diluted from 21.1% to 15.8%

As an example, if the entrepreneurs were able to get to the Series C equivalent funding amount and valuation, without having the equivalent Series B in the interim, they’d have each have 21.1% of the company instead of 15.8% — that’s a major difference. More success with less capital invested is always a great formula.

What else? What are some other thoughts on the value of “skipping” a round of funding?