Dilution Dance for Each Financing Round

10 years ago when we went out to market to raise money for Pardot, potential investors talked about wanting to buy 33-40% of the business in the Series A. As an entrepreneur, the thought of selling that big of a chunk in one single round bothered us, and we ended up passing. Fortunately, we were able to get to a nice exit without raising institutional capital. Now, typical funding rounds are in the 15-30% dilution range (not counting growing the employee option pool, which usually adds 5% more dilution).

Today, entrepreneurs have more choices. Options like revenue financing, investors that will do straight secondary (liquidity for the entrepreneur), and more varied pools of money (e.g. family offices doing venture-like deals, etc.) were unheard of in the past. It’s a great time to be an entrepreneur.

Another feature of today’s market is that you can sell even smaller chunks of the business, especially if the startup is considered “hot.” Investors are sitting on so much cash, many of the rules like “I need to own 20% of the company” no longer apply. If you want to sell 10% of the startup, many more investors are likely interested, assuming it meets their criteria.

Entrepreneurs would do well to find the balance between selling as little of their startup as possible and raising enough money to reach their next milestone or inflection in the business. Times are good, so it’s advisable to raise a little extra, but of course that’s extra dilution as well. There’s a dilution dance with each financing round, and entrepreneurs with desirable startups would do well to assume the standard “rules” are all negotiable.