Do you want to call on external investors to finance your growth? This is a necessary step for many entrepreneurs. However, it is advisable to anticipate the dilution mechanism in fund raising. Go for it but don’t forget two things:
1- You should always remain the majority shareholder of your company.
Dilution is a natural phenomenon linked to any capital increase. The founders of the company see their percentage of ownership of the company’s shares decrease after the fund raising. However, it is recommended that the founders always hold more than 50% of the company’s voting rights. This way, they can keep the power of management and remain in control of major decisions.
It is also important to note that some investors, known as “hands off” investors, will not want to invest in your company if you lose the majority of the shares. If you are no longer the main owner, your motivation may decrease. However, the main interest of a “hands off” investor is to finance you in order to get out of your capital with its capital gain within 5 to 8 years. Moreover, he does not have to manage the operational or the strategy of your company.
*A “hands off” investor will not want to interfere in the strategic and operational decision making unlike the “hands on” investor.
2- You should always anticipate future fundraisers (if you have any planned).
With each fundraising, you will dilute your capital. If you have planned 2 or 3 fundraisings, you must anticipate the dilution of your capital. It is advisable to always be around 66.67% of the capital before each fundraising. This safety margin is recommended in the fundraising world.
But you should also know that the more funds you raise, the more the valuation of your company will increase and the lower the dilution of your company will be. In fact, in Europe and the United States, a reasonable level of dilution (percentage given to investors) is between 10% and 25% of the capital. Selling more than 25% is very disadvantageous for the founders. Below 10%, your deal shows a strong competition between investors.
Fundraising dilution: in conclusion
s you can see, raising funds will help you finance the start-up or the growth of your company. However, don’t forget that the phenomenon of dilution is real and that consequently, you should always remain the majority shareholder. Finally, it is important to anticipate your next fundraising in order to keep control of your company.
If you wish to be accompanied in your fundraising process, call Advimotion, a consulting firm specialized in fundraising for start-ups and SMEs.
Advimotion, your partner in growth.