What to expect when you’re expecting (dilution)

Nice place you’ve got here, Dirk! Thanks for letting me pontificate for a moment.

Let’s jump into a question we get all the time at Carta - how much of my company should I sell in each venture round?

All data below comes from the 43,000+ companies using Carta as their cap table platform today. US data only.

Dilution starts (even though it may not feel this way) with the SAFE round.

Lots of founders are using SAFEs to raise their initial $500K…or $1M…or $5M. It’s much more common than it used to be.

But if those SAFEs are all post-money, the dilution adds up quickly. Founders should be wary of stacking too many SAFEs on each other as they come with anti-dilution effects for investors.

Alright, on to the priced equity.

Looking at just 2023, the standard venture advice of 20% sold in early-stage rounds held true. But have things shifted towards the founder or investor over time?

Heartening! Over the prior 4 years, founders have consistently sold less of their companies at each stage. 

Some reversal at the later stages in the difficult fundraising market of 2023, but overall this is a rosy picture…or is it?

Dilution doesn’t just happen in primary rounds (which all the prior graphs covered). More founders are having to raise bridge financings in between primary rounds in order to stay afloat - and this dilution adds up quickly.

So if a founder raises a primary Series A and then goes back to the same VC set for a Series A bridge - that founder may sell 30% of the company to those investors.

And that’s not all. Dilution is a function of valuation and round size, but the terms of the deals matter greatly. Certain investor-friendly deal clauses have become more common in recent months.

Liquidation preferences over 1x rose sharply in late-stage rounds last year - meaning those companies will need to achieve larger exits in order for the non-investors on the cap table to see any liquidity.

Whew. Lots of slices of pie going out the door as you raise. But as the saying goes, even a small percentage of a billion dollars ain’t so bad.

If this sort of data analysis piques your interest, check out our Data Minute newsletter. One new chart of venture data every week on Thursday mornings!