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A VC seeds a Pre-Seed startup (the status label then change from Pre to Post-Seed). As I understand it, stakeholder objectives include maximizing value (100% of zero is nothing and 20% of $10M is more). My understanding is that founders seek control, which is greater moving left in the chart.


Why would the Seed Investors (VCs, not founders) want to move to the next column: Post-Series A?

In what situation would the Founders not have the ability to Veto moving to Post Series A?

  • 1
    Sometimes these companies are stuck between a rock and a hard place and NEED money to continue existing. When you NEED someone's money, they have pretty strong negotiating position. Also, a portion of an existing investor's position may be cashed out in subsequent transactions.
    – quid
    Apr 11 '18 at 20:29
  • What is the meaning of the option pool here?
    – not2qubit
    May 23 '19 at 17:53

First, read the answers, including mine, at Why is stock dilution legal? That question is why stock dilution is not inherently always a bad deal.

Now, this question is asking what the circumstances are that would make stock dilution a good deal.

Using the example from my answer to the other question, let’s say you’ve got a 10% stake in a company that is not publicly traded. Because it is not publicly traded, it is difficult to determine a value for your shares, but let’s say that you believe the company to be worth $100,000 currently, meaning your stake is worth $10,000. Now let’s say that a new investor comes in, believes in the company, and want to make a $200,000 investment in the company for a 50% stake. This is a much higher value on the company then you were thinking. When the sale is done, the company is richer; the same company that you thought was valued at $100,000 now has $200,000 in new cash, so you now value the company at $300,000 (at least). You now only hold a 5% stake, but your share is now worth $15,000.

Essentially, stock dilution is a way to sell part of the company as it grows. Whether or not it is a good deal for existing investors depends on both aspects: “Would the added cash be good for the company and help it grow?” and “Am I getting a good price on this sale?”

  • I think your last paragraph is key - both outlining that the cash itself can be necessary in the short term to the operations, but also that such a sale could even imply an increase in imputed value of the original shareholders holdings [even though their % ownership may decrease]. Apr 12 '18 at 16:37

For a startup, the case is usually that the company is not making a profit yet, but has a reasonable plan for how to become profitable with more capital. For the owners -- founders and seed VCs alike -- the choice is then either to shut down the shop once the seed money is spent, and lose their investment, or take in more capital.

At this point the seed investors naturally prefer ending up with a diluted share in a company there's still hope for, than to own a large share of a worthless one.

VCs who put in seed money generally don't expect from the outset that their ownership share will stay as large as it is initially. Often the business plan will openly state that the seed capital is only meant to get the company far enough to have something concrete to show for attracting the next series of investors. The seed VCs put up money early in the hope that by that time the company will look promising enough that they can get later investors to accept a deal where the seed investors will have paid in less cash per diluted share than the latecomers do.

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