Why Most Startups Sell Exactly 20 Percent at Seed

Why the hell does every startup sell 20% in their seed rounds?

Because the dilution is dictated by the needs of the fund, not the needs of the founder.

(and yes, I realize it's not every company, chill).

Appreciate this perspective from Frank Rotman who finds it crazy that most venture deals resolve back to a simple division exercise. That division, btw, is 𝗖𝗮𝘀𝗵 𝗥𝗮𝗶𝘀𝗲𝗱 / 𝗣𝗼𝘀𝘁-𝗠𝗼𝗻𝗲𝘆 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 = 𝗣𝗲𝗿𝗰𝗲𝗻𝘁 𝗦𝗼𝗹𝗱.

And look at the data below - even as the round sizes shift across tons of different kinds of startups, the dilution remains locked around 20%. Especially at Seed.

Two separate dynamics happening:

• The amount of capital needed for each business has got to be highly varied. But round sizes are not nearly as diverse as they "should" be. Meaning companies are having trouble knowing how much money they really need, which is a hard question!

• The investors need to own a certain percentage of the company to make all the fund math work. Do they 𝗿𝗲𝗮𝗹𝗹𝘆 need to own that much? What if they don't lead the round, so they are more at the whim of the leads' needs? There are lots of models that could work in venture.

Key thing if you're a founder: you do not 𝗻𝗲𝗲𝗱 to sell 20% of your company in a seed round. You can raise a tiny seed! You can raise a massive one! You can highly dilute or merely titrate your equity. It's all possible.

But the VCs will often have rules around what they need to own, and that may dictate your fundraise more than it should.

#startups #VC #founders