Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 2 down vote favorite
1

When an investor invests an amount in a startup company exchange for equity, how do they protect themselves from being significantly diluted by a larger investor? And is that even an issue?

share|improve this question

1 Answer

up vote 1 down vote

It certainly can happen. There are a few things I've seen early-stage seed investors do to protect themselves from dilution:

  • Have the right of first refusal on any new funding rounds that are needed. That way the early stage investor can grow their investment in the company as the company matures.
  • Get a seat on the board and be part of any decisions for future funding
  • Similar to a board seat, acquire a controlling stake in the company and ensure that any funding decisions are the investor's to make

In general, angel investors will be diluted by new rounds of funding, but the investors and founders will be affected equally by new rounds of money. What it comes down to is working with the founders and helping them make the company succeed- sometimes more investment means you get a smaller slice of the pie, but the overall pie will get a lot bigger.

share|improve this answer
+1 for more investment=smaller slice but overall pie will get bigger. Look long term. IMO it's far better to have 25% of a $250M company than 50% of a $20M company. – edralph May 10 '11 at 13:55

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.