Dilution vs. Control.
It’s an age-old debate in the startup ranks. After all, how much money you take certainly impacts the ownership you hold, as well as the control you wield over a startup.
It’s a touchy subject that often pits entrepreneur vs. investor, and it usually doesn’t emerge until things head south, which they almost always do at some point in a new startup.
Dilution vs. control was one of the important topics that we jumped into at GeekWire Startup Day last Friday. Venture capitalists Frank Artale of Ignition; Greg Gottesman of Madrona and Seattle super angels Rudy Gadre and Geoff Entress shared some perspectives during the venture capital panel discussion, offering their inside takes on the debate.
“If you have a big outcome, all of the dilution, it really doesn’t matter,” said Artale. “The investors want you to be well rewarded at the end, so the big outcomes will require big money and you will make out big. So, anyone who comes to one of us and says: ‘I don’t want to raise a lot of money because I am afraid of dilution.’ Well, we are like OK. Next question kind of thing.”
Gadre, the former general counsel at Facebook and one of the leading angel investors in Seattle, agreed.
“If I see an entrepreneur coming to me and talking about dilution, I say: ‘This person’s focus is all wrong, and their priorities are all wrong,’” said Gadre. “Control, on the other hand, is actually quite important, and I think there has been a trend towards more founder control of companies — partly influenced by companies like Amazon and Facebook. If I am the founder, I am much more worried about control than I am dilution at the early stage.”
Madrona’s Gottesman pointed out that there is control in the legal sense — basically what the documents say. But he also said that there’s an “informal sense” of control and who is running the company.
“If you feel uncomfortable with a venture capitalist from a credibility standpoint, from a reputation standpoint or the way you have interacted, you should not take that venture capitalist’s or angel investor’s money… So much of this is based on trust, and we feel the same way. One of the biggest mistakes people make when they are pitching is that they oversell, or they say something that later on turns out to be untrue. When we are putting money into someone or you are taking money from us, the most important things that we have is a trust we have with one another that we are going to do the right thing during hard times…. We really want to get a chance to get to know you, and you should really get to know us as well. Because in these control issues, if there really isn’t a deep relationship based on more than a formal legal agreement, then problems happen.”
Here’s a look at the full discussion in which the investors talk about what they look for in entrepreneurs; when companies should raise money; the hot sectors they are investing in; and how to pitch a venture capitalist. The main discussion around dilution takes place in minute 13:45 after Moz CEO Rand Fishkin asked the question via Twitter.
Also, for more on this topic, make sure to check out the remarks from my interview this week with Lively and Visible Technologies founder Dean Graziano who had some fascinating things to say about dilution and control as an entrepreneur.