Founder’s Dilemma on Dilution – Trade-Offs:
Dilution Vs Control: One does not lose control of business so long as founders continue to deliver great outcomes, the relative power of Founders will always be higher vis-a-vis ownership. Besides legalese may help retain control to drive the destiny of biz.
Dilution Vs Cash flow: Most often funds requirements are based on an optimistic scenario with limited provision for contingencies may put the biz at risk, and raising money during may result in higher dilution
Dilution Vs Timing: Money should be raised when it is available and one should avoid timing the market.
Dilution Vs Use of time: Bandwidth of the team is mostly stretched despite priority being biz building, one has to go through a painful, time-consuming and energy-sapping process of fundraising, therefore minimizing times on fundraising is desirable.
Dilution Vs Scale: Scaling faster is a given, need to strike a balance that ensures survival and staying ahead is important.
Dilution Vs Value creation: Creating different financial scenarios will help in the decision, a delay in raising funds by just a few months may lead to lower value creation despite higher ownership.
Raising Revenues Vs Only Debt/Equity: The founders can also explore options to increase cash flows from the business instead of focusing on just debt and equity. The founders can by leveraging some of the intangibles developed by the firm and also try and find ways to explore revenue lines.
In conclusion, the founders can use this framework to take their own decisions if and how much to dilute.
January 2019
