Founder Dilution – How Much Is “Normal”?

This is a subject near and dear to entrepreneurs, maybe the dearest subject of them all. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

Founders who "go all the way" through the process of building a lasting and sustainable/profitable business (as opposed to an early exit) will generally suffer the most dilution. In my experience, it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it's all said and done. The equity split at 20% for the founders will typically be; 20-25% for the management team, 20% for the founders, and 55-60% for the investors (angel all the way to late stage VC).

That's a rule of thumb and it can be worse (I've seen founders end up with less than 5%) and it can be better (the google founders own >25% of the company after the dilution of an IPO). It all depends on the amount of capital a company needs to raise and the valuations it can raise it at and the timing of those financings.

Founders who opt for a "quick flip" or any form of early exit (early means to me before the company becomes sustainable/profitable) can see much less dilution. Joshua Schachter owned more than 50% of delicious when it was bought by Yahoo! The four founders of FeedBurner owned well north of 25% of the company when it was sold to Google. Those exits are generally for less money so its more ownership times less total value. But even so, that can work out well for the founders and is a big reason why early exits continue to be part of the venture capital landscape.

Most of what I've just written is pretty well known in the venture capital/startup world. Sim Simeonov of Polaris Venture Partners would like to get a more exact set of data on this and he's put up an online survey hoping that entrepreneurs of all kinds will take the time to fill it out so we can be more exact.

It's a short survey and won't take long to fill it out. So if you've got data to share, please take a minute or two and fill out the survey. Sim will publish the data on his blog and I'll reblog it here as well.

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