After yesterday’s post on Raising Money as Forcing Function to Drive Towards an Exit, an entrepreneur brought up another point to me: raising money also starts the track towards the founders no longer owning the majority of the business, and, often, losing control. Many entrepreneurs start companies to be their own boss as they have a high internal locus of control. Only, after two, sometimes even one, round(s) of financing, the founders no longer have control.
Here’s how the math might look:
- Start – Founders own 90% with a 10% employee option pool
- Series Seed – Sell 15% of the company and add another 10% to the option pool for 25% dilution taking the 90% for the founders down to 67.5%
- Series A – Sell 25% of the company and add another 10% to the option pool for 35% dilution taking the 67.5% for the founders down to 43.9%
So, in a “normal” scenario, after the second round of funding, the entrepreneurs no longer own the majority of the business. But, now the startup has the desired capital to execute against the plan and hopefully build a large, successful business.
Entrepreneurs need to understand the trade-offs and determine how far they can go on their own vs going faster with outside capital. The long-time question investors like to offer up to entrepreneurs: would you rather own a slice of a big watermelon or the entirety of a small grape.
What else? What are some more thoughts on the founders reaching the stage where they no longer own the business?