Question & Answer
How Do Founders Avoid Getting Diluted Too Much?
Raising capital is a double-edged sword. On one hand, it fuels growth. On the other, it can strip founders of control and value if not structured carefully. Avoiding excessive dilution isn’t just about protecting ownership; it’s about ensuring long-term leverage in decision-making, exits, and future fundraising rounds.
Let’s break this down from an investor’s perspective.
Equity: The Expensive Currency
Equity isn’t free money. Every share you issue is a slice of ownership given away—permanently. When founders treat equity casually, assuming they can “always raise more,” they often find themselves minority stakeholders in their own vision. That’s why structured deal-making is crucial.
Smart Deal Structuring to Avoid Excessive Dilution
One of the core principles I discuss in Deal Structuring is that dilution isn’t just a function of raising money—it’s a function of how deals are structured.
Raise in tranches instead of taking a massive valuation hit upfront. A portion now, another upon hitting revenue milestones, and the rest at a pre-agreed future valuation. This way, the company grows into its valuation rather than surrendering too much equity at a lower valuation.
Use convertible instruments like SAFE notes or convertible debt. These allow founders to raise capital without setting an immediate valuation, delaying dilution until a later round when the company is worth more.
Consider debt if the business model supports it. Not all capital needs to come from equity investors. Revenue-based financing, venture debt, or bank loans can provide the cash needed without giving away ownership.
Negotiate pro-rata rights for early investors. If an early investor believes in the company’s potential, ensure they have the option to maintain their percentage in future rounds. This reduces the need to bring in too many new investors too soon.
Leverage strategic partnerships. Instead of funding everything with investor cash, structure deals where partners contribute resources, distribution, or capital in exchange for revenue shares rather than equity.
The Right Balance Between Growth and Ownership
Founders often struggle between raising enough capital to grow aggressively and keeping enough equity to make it worthwhile. The key is structuring deals that align capital needs with valuation growth.
A poorly structured deal can leave founders on the sidelines of their own company. A well-structured one ensures they remain in control, raising smart capital at the right valuation, with minimal unnecessary dilution.
In Deal Structuring, I go deeper into alternative funding models, equity carve-outs, and investor-friendly but founder-protective deal structures. The bottom line? Dilution isn’t inevitable—it’s negotiable.
Deal Structuring
Buy the book today and dive into practical techniques that empower you to get started immediately, navigating transactions efficiently and maximizing your success in minimizing cash requirements.
In this book, you will:
- Be introduced to the fundamentals of deal structuring
- Learn 19 proven deal models for structuring deals
- Discover 39 key elements of deal nuances
- Access 32 actionable clauses for your term sheets
- Explore 9 specific deal structures
- Receive 257 pages of invaluable insights
- Gain the distilled expertise of 20 years