There are three mistakes that are easy to make
that can increase the share dilution from
your convertible notes and SAFEs.
This video talk about what those mistakes are
and what you can do to avoid them.
Hi, I'm Steve Morris. Not use the StartupSOS
channel to provide practical how to advice
for first time entrepreneurs.
So today, mistakes you should avoid
that can increase your dilution.
Mistake number one is getting surprised
by how many convertible securities
you've got. Whether those are notes or SAFEs
and how much dilution that's going to cause you
when it converts in a priced round.
What can you do to avoid that problem?
Simple. Track your securities,
track your convertible notes and
your SAFEs and keep track of
what are the pre-money caps and what
implications do those have for additional
shares? Additional dilution.
Keep track of the discounts, you know, for the
same reason.
Keep that information in front of you
so that you're aware of how much
money will be converting in the future
when you do that price round.
If you keep track, you won't get surprised.
Mistake number two is kind of related to mistake
number one. But instead of having so much
funding from convertible securities that
you get surprised by the dilution you're going
to get, it's surprising your future
investor, the investors in that series,
A, that are going to convert the SAFEs in the
convertible notes.
If you have too much money
in convertible securities, say multiple millions
of dollars, and then you go try to raise, say, a
couple of million dollars from a Series
A well that's potentially a lot
of dilution that the Series A investors
are looking at when all of that SAFE money
converts or all of those convertible notes,
converts. That can really put them off
and make them a lot less motivated to
do a price round.
So be careful about
the dilution you're going to cause your future
investors. What can you do to manage that?
Well, what you can do is be proactive and
develop a funding strategy.
Think through how much money you need
to raise through your convertible securities,
whether that's SAFEs or convertible notes.
What milestones will you hit with those
funds and how will that increase your
value so you'll be ready then to do a price
round at a higher valuation?
Probably a larger round.
So that the size of that round makes sense
compared to the size of the SAFE money that
you've closed.
If you think it through, be proactive and plan
your funding strategy, you won't get surprised
with that issue with your Series A Investors
where you get too much in the way of convertible
securities and too small of a
Series A round.
Mistake number three is not understanding that
there are different ways that convertible
securities can convert in a Series
A investment, and those different
ways can have very different impacts
on your dilution as founder.
So some quick examples.
It's very common in one scenario for a Series
A investor to say we want you to issue
some options before we invest so it
increases the number of shares
in a fully diluted case for your
company. And then when we invest, we
won't get diluted by those shares.
The founders will.
But then we're okay with converting the
other investors, your convertible securities,
on top of that. And yeah that'll dilute us and
it'll dilute the founders both.
That's one scenario. But another scenario
that protects the Series A investors much
more strongly, if they have a strong enough
negotiating position, is that they
want to see a fixed percentage of shares going
to an option pool and a fixed percentage of
shares owned by the Series A investors
at the end of the investment after
all of the convertible securities
convert. So in other words, they want
the founders, not only to absorb
the impact of the dilution from the option
pool, but they want them to absorb
the dilution from converting all of those
convertible securities.
Needless to say, that's a great deal for the
Series. A investors, not such a great deal
for the founders, but it all comes down to a
negotiation. How much negotiating
power does the Series A investor have versus
the founders? If you have a lot of people ready
to invest in your company, you can probably
negotiate a better deal.
If you're about to run out of money and you have
one Series A investor willing to invest, they
probably have a lot more negotiating power.
So it all comes down to negotiation.
So what can you do to avoid that mistake?
Well, do your homework.
So at least you are prepared.
You understand these different approaches and
you understand the different impact
on the founders of the dilution of the different
approaches .
And of course, there are a lot of options in
between those that you might be able to
negotiate. So do your homework and understand
what your options are.
We're going to help with that in the next video.
We'll walk through those two specific scenarios
we talked about with a spreadsheet that you can
download and show exactly
how delusion works in those two different
situations with either a convertible note
or a pre-money safe.
So this might be a good time to click the
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miss that.
So that's a wrap for our discussion of the three
mistakes that increase your
dilution a good thing to avoid.
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Because again, that next video will describe
exactly how the dilution works
in those two scenarios and provide you with a
downloadable spreadsheet so you can play around
with your own numbers for your own convertible
note or SAFE.
And you'll see a link to the playlist
that'll have that next video in it as soon as
it's available right below me.
So it's easy to check it out.
That's it for now. Thank you very much for
watching.