Equity dilution works when the same pie is divided among more people. The founder of a company starts by owning all the shares representing ownership of the company. Over time, other people receive pieces of equity in exchange for work (employee stock options), money (seed, angel and venture investors), or services (attorneys, directors, etc.)
The challenge you face is that there are other amazing ideas out there. Actually, there are many, many, brilliant, wonderful, amazing ideas out there. So faced with all these amazing ideas, investors invariably choose the ones that have been reduced to practice, developed traction of some kind and proved that they are amazing businesses, not just ideas.
When should a convertible note be treated as a replacement for an equity round, and take on characteristics of an equity financing?
It doesn’t work that way. A convertible note and an equity round are two different things, done for different reasons. In most cases, the former is a quick way to get some money in the door in anticipation of the latter.
There is no average, because every company and situation is different. But as a general rule of thumb, the investors in each round of financing will get somewhere between 15% and 35% of the equity in the company, and the total amount raised in each round should be enough to get the company to a significant increase in value.
The answer is no, yes, and it’s irrelevant. 🙂
Back in the days of the dinosaurs, my first software company was in the wireless communications space (when that meant “pagers”, not “smartphones”), and our product let you type a message on your computer and send it to a pager, using a very simple protocol known as “TAP”. We were—by far—the market leader in
How will you make money (and no, advertising is not the answer)? Who, specifically, is your first customer? Second? Third? What is your contingency plan for when this seed round is exhausted, and you are unable to raise any more? What is your API/platform/partnership strategy? How are you going to sell the company, and to whom, within six years?
Are balance sheets or profit and loss statements necessary to produce for early stage startups with no revenue?
Investors absolutely need to know the specific financial status of a company before they invest, because they are going to be part owners of the business. How much would you be willing pay someone to take over their bank account if you had no idea how much was in it?
So yes, it is absolutely standard practice for investors to require both existing financials
I’ve written on this topic previously, including David S. Rose’s answer to Startups: What is the worst startup pitch ever?. While I’ve never laughed outright during a pitch, I’ve certainly had quite a few occasions where I had to work hard not to wince. The problems with bad pitches tend to fall into the following major categories:
One of my investors wants me to host a session where all the investors can meet and talk to each other. Is this a normal request?
There’s nothing inherently wrong with your investors meeting each other, and it’s actually usually a pretty good thing. That said, it’s a bit unusual coming from the F&F side rather than the professional investor side. So I’d just be a bit cautious in trying to understand why your friend is pushing for this. Could it be that s/he just want
There is not a definitive answer to this, because a good lawyer can write terms into either one to make one or the other preferable to one or the other party.
That said, the primary entrepreneur-friendly reason for doing a Convertible Note (and the reason that no serious investor under regular circumstances will therefore do an uncapped note) is: