Raising more capital is not necessarily dilution. It’s what you do with the money after raising it.
When you accept a new investor, everyone’s piece of the pie gets smaller because the pie is fixed but the number of shares issued have increased. So your share of the company may go from 20% to 15% because of the new investor.
However, if the shares are priced correctly, the value of each share should go up because more equity has been sold. So your total 15% after the round should be worth more than your 20% before the round. This is accretion, or increase in value. The important thing is to look at your worth, not your percentage.
Now if you take the money and use it on things that do not add value to the company, such as features that customers don’t want which cause your sales to fall, then you have lost money and the value of your company decreases. This is the real dilution.
“Dilution is a function of your burn rate relative to your accretion of value. It is often measured in financing events, but it actually plays out every day in the choices the startup makes and the work the startup accomplishes. Simply put, if you are accreting more value than you burn, there is no dilution. If you’re burning more cash than you’re accreting value, then there is dilution.
Put another way, you’re not being diluted because a VC decrees it; you’re being diluted because you spent money building features that your customers didn’t want, instead of the ones that they need. You’re being diluted because you kept scaling up an ineffective sales process because you didn’t want growth to slow.
Each financing event is more of a check-in point on the value of the company than a true dilutive or accretive event. It’s the time between the financings, when the company was burning cash to build additional value, that was truly the accretive or dilutive journey. In other words, the company isn’t worth $20 million because someone bought stock in a day. Its valuation increased from $10 million to $20 million because of the work that was done to increase the value of the company that greatly outpaced the cost of creating that value. If the cost outpaced the value of the work, that would have been dilutive, as demonstrated by a down round.”
In summary, ensure that each dollar you spend adds value to your business.
Everyone generally agrees that dilution should be avoided. VCs insist on pro-rata rights to avoid the dreaded “D” word. Executives often complain, after a new financing, that they should be “made whole” to offset the dilution that came with the new round. Founders work as hard as they can to maximi…