Category Archives: Investors

Stock Dilution

For a startup, stock dilution is an ownership impact caused by the issue of additional shares of common stock.  When the startup issues more common stock, by definition a stockholder then owns a smaller percentage of the total number of shares.  This is stock dilution.  It impacts both shares and options.

From a Silicon Valley perspective, all startup shareholders need to understand that they will be diluted. The well-informed CEO makes sure that anyone receiving equity understands this before they receive any equity. Unless the startup CEO wants to give him/herself a headache and lose the respect of others, he/she should not allow any shareholder to receive contractual protection against dilution.

Some investors such as some European real estate developers expect to receive anti-dilution protective covenants in their term sheets. Any Hitech startup that gives this protection needs to understand that it will be difficult to raise funds from others without also giving the new investors dilution protection. If the startup needs more than two or three rounds of investment (as almost all do), this quickly becomes a “MESS”.  Such a Hitech startup is very unlikely to make it on to any professional investor’s shortlist of investment opportunities.

This issue of new shares might be caused by:

  • A tranche of investment

  • An initial public offering (IPO)

  • Or less likely the conversion of convertible bonds or warrants into stock

The dilution can result in

  • Changes in ownership percentage

  • Changes in voting control (see Control Dilution below)

  • Or less likely in importance, from a startup perspective; changes in income per share or changes in the worth of individual stocks

Control dilution

“Control dilution” refers to the potential loss of voting control or influence due to stock dilution.

Conclusion

From a Silicon Valley perspective, all startup shareholders need to understand that they will experience stock dilution.

References

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List of Silicon Valley Angel Groups

This Post is a partial list of Silicon Valley Angel Groups.  An angel investor is a wealthy individual who invests in a business startup. A few are billionaires.  They provide (primarily) investment and advice to startups. Angels are also known as business angels. Angel investors and some venture capitalists who invest in early stage startups…Continue Reading

Mistakes While Raising Startup Capital

There are many types of mistakes while raising startup capital. This post addresses several that occur all too frequently. Poor preparation You need to prepare before starting to meet with potential investors. Please see our Blog Posts: Before First Contact With An Investor Investor Strategy for Startups Your Due Diligence on Potential Investors Not enough…Continue Reading

First Contact With An Investor

Before First Contact With An Investor In planning your first contact with an investor: Develop a list of criteria that an investor in your company must have Research relevant investors and develop a list of candidates Plan your first contact with each investor Before your first contact with a specific investor: Further research the relevant…Continue Reading

Unique Information in Your Investor Presentation

Unique information in your investor presentation will help you to stand out. Each new venture needs to be unique.  So during Investor Presentation Development one needs to consider unique information that has not been addressed in other sections. Unique Information in Your Investor Presentation This section/slide of your presentation to investors should address information that does…Continue Reading

Investor Presentation Development – Fund Raising

Fund-raising is a subject the Company usually wants to discuss only with Investors. However, business partners and customers are also interested and in early days may insist on knowing about it. Business development executives and Investors prefer that the Company include valuation expectations. However, the Company is advised to be informed on this; but not…Continue Reading

Investor Presentation Development

As you start developing your Investor Presentation for your early stage startup, you are really developing or modifying your Business Plan. Work through addressing the following Sections. This list may change slightly depending on your business.  Plan on a 20 minute presentation.  But be prepared to use only one slide to do a very short;…Continue Reading

Your Due Diligence on Potential Investors

Fund raising is a crucial aspect of a new venture’s corporate life-cycle. Your Due Diligence on Potential Investors Your Due Diligence on Potential Investors needs to include both strategic selection of investor groups and detailed research on individual executives within investment firms/units. Planning for a Meeting With a Potential Investor Part of your planning for…Continue Reading

Investor Package Meeting I

Your Investor Package Meeting I includes: Research Results You researched this investor.  You know that he/she is interested in startups in your space.  You understand what prior investments he/she has made in other startups in or near your area of activity and in what geographic regions.  You understand that he/she is comfortable with your preferred…Continue Reading

Investor Strategy for Startups

An Investor Strategy for Startups is key for new ventures.  It is required as a part of your fundraising. Investor Strategy for Startups Your Investor Strategy is an internal document that guides the co-founders (and later the officers) of a startup in: Determining which Financial Exits are acceptable to you and therefore must be acceptable…Continue Reading

Before Raising Your First Angel-Seed Stage Investment

Your first Angel-Seed Stage investment is a key part of a startup’s emergence into the real world. Before Raising Your First Angel-Seed Stage Investment Before you start raising your first Angel-Seed Stage investment for a hitech startup, you should have completed the following tasks: Product definition (you know what the product is) Co-Founders in place…Continue Reading

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