What can we learn from nuclear physics to make pro-rata discussions less radioactive?

One question that inevitably comes up in every investment round (except for a startup’s very first one) is whether existing investors participate in the financing, and if so, to what extent. As Fred Wilson wrote a little while ago, it’s become an increasingly controversial question in recent years and has led to many arguments between founders, early-stage investors, and later-stage investors.

Pro-rata 101

If you’re not familiar with the topic, here’s a quick primer. If you know the basics of pro-ratas, you may want to skip the next few paragraphs.

If a company raises capital by issuing new shares to a new investor, the total share count of the company increases, and consequently, the ownership percentages of existing shareholders decrease. That process is called “dilution”, a term that, before raising my first VC round in 1998, I only knew in the context of homeopathy. Homeopathic dilutions are typically so extreme that not a single molecule from the original substance remains in the solution, which means that homeopathy is a $5 billion business of selling nothing (but water and alcohol). The amount of dilution in a VC round (or any equity financing) depends on the valuation of the company and the investment amount and is typically in the 15–30% range. …


Christoph Janz

Internet entrepreneur turned angel investor turned micro VC. Managing Partner at http://t.co/5WJ3Pepbcv.

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