June 26, 2025 • 31 mins
Introduction to Equity Dilution and Its Impact on Investors
Equity Dilution Definition: Occurs when a company issues new shares to raise capital, leading to a decrease in the ownership percentage of existing shareholders.
Founder's Perspective: Founders often face the decision of whether to retain complete control over their company or raise capital by accepting dilution, which can significantly impact their future earnings and control.
Key Stakeholders: Includes founders, employees, and investors who are all affected by dilution.
đź’ˇ Understanding the Mechanics of Dilution
Cap Table Management: A cap table tracks ownership percentages. New funding rounds can disrupt the cap table, reducing existing stakeholders' ownership.
Employee Stock Options: Commonly part of compensation packages in growing companies, often subject to dilution effects.
Investor Leverage: Investors with high demand for a company's stock can negotiate for favorable terms, minimizing dilution for founders.
🌟 Key Strategies to Minimize Dilution
Bootstrapping: Funding the business without external capital to avoid giving up ownership.
Strategic Capital Raises: Raising funds when the company is performing well to leverage maximum valuation.
Structured Shares: Implementing classes of shares (e.g., with voting rights) to maintain control.
🎯 Why Timing Matters
Critical Path Investments: Companies often raise capital in dire situations, leading to unfavorable terms for founders.
Market Dynamics: A company's performance significantly influences its negotiating power during fundraising rounds.
🔄 Balancing Control and Growth
Founder Autonomy: Utilizing founder shares and supermajority voting rights to maintain control even with minority ownership.
Employee Retention: Maintaining an adequate employee stock pool to attract and retain talent without excessive dilution.
🗨️ Expert Insights from Rory and Ed
Rory Liebhart: Highlights the importance of legal and financial advisors in navigating complex cap tables and negotiations.
Ed Barton: Emphasizes the strategic use of multiple funding rounds to enhance valuation and
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Who Are We?
Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).
Through the Private Equity Experience Podcast, our book On‑Ramp to Exit, and a library of free tools and templates, we share real‑world stories, practical strategies, and insider insights to help you navigate every stage of the PE journey — whether you’re leading a portfolio company, joining a deal team, considering PE, or just PE‑curious.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
emily-sander_1_05-29-2025 (00:34):
Quiet and distant is always how I
describe Ed Barton.
My goodness, definitely notFoghorn.
And what is the opposite ofdistant,
ed-barton---it-_1_05-2 (00:45):
Foghorn.
emily-sander_1_05-29-202 (00:46):
nearby engaged.
Alright, here we go.
Locked in.
We are locked in and ready to goon the Private Equity Experience
podcast and
squadcaster-a956_1_05-29-2 (00:58):
are.
emily-sander_1_05-29-2025_1 (00:58):
our kickoff question.
I'm gonna go.
I'm gonna go to Rory.
Rory, when you used to drink
squadcaster-a956_1_05-29-2 (01:07):
Hmm.
emily-sander_1_05-29-2025_15 (01:07):
at least more than you do now,
would you go for the strong shotthat burns or a watered down
cocktail that lasts all night?
ed-barton---it-_1_05-29-202 (01:16):
Oh.
squadcaster-a956_1_05-29-20 (01:17):
Oh, I think you know the answer to
that.
I'd go, I'd go strong and.
Hard hitting quickly, generallyspeaking.
Uh, yes.
Yeah, very much a used to be awhiskey guy.
Um, so, you know, the higher theproof, the better back in the
day.
Um, Yeah, definitely
emily-sander_1_05-29-2025_ (01:36):
Rory may or may not have drank to the
point of like lights out
squadcaster-a956_1_05-29- (01:41):
yeah,
emily-sander_1_05-29-20 (01:42):
nights.
Yeah.
squadcaster-a956_1_05-29 (01:43):
times.
More than a few times.
Yeah,
emily-sander_1_05-29-2025_1 (01:46):
Mr.
Barton,
squadcaster-a956_1_05-29-20 (01:47):
and had a little more constitution.
Now that would, that'd be,that'd be a real problem for
emily-sander_1_05-29-2025 (01:52):
would you be down for the count for
like days if you did that?
squadcaster-a956_1_05-29- (01:55):
Yeah.
Yes.
The hangover effect is really adeterrent for me, uh, in so
emily-sander_1_05-29-2025 (02:01):
Yeah.
squadcaster-a956_1_05-29-20 (02:01):
of, of consuming alcohol.
Yeah.
emily-sander_1_05-29-202 (02:06):
Edward Barton.
Is there any car fluid thatactually gets better when you
dilute it, or is it always a badidea or a last resort situation?
squadcaster-a956_1_05-29-202 (02:16):
my gosh.
ed-barton---it-_1_05-29-202 (02:17):
any car fluid that gets blinker
fluid gets better when youdilute
emily-sander_1_05-29-2025_1 (02:21):
Oh.
squadcaster-a956_1_05-29-2025 (02:24):
I didn't know there was such a
emily-sander_1_05-29-2025_15 (02:26):
Me neither are you?
Are you making this up?
squadcaster-a956_1_05 (02:28):
actually.
emily-sander_1_05-29-2025_1 (02:29):
God bless, blinker fluid.
What the hell?
squadcaster-a956_1_05-29- (02:35):
Yeah.
emily-sander_1_05-29-2025_1 (02:36):
All right.
squadcaster-a956_1_05-29 (02:37):
that's that's classic.
ed-barton---it-_1_05-29 (02:38):
Nothing gets better diluted, whether
that's
squadcaster-a956_1_05-29 (02:41):
segue.
ed-barton---it-_1_05-29-2025 (02:43):
or
squadcaster-a956_1_05-29-2 (02:44):
Hmm.
ed-barton---it-_1_05-29-202 (02:45):
car fluid or your cap
emily-sander_1_05-29-2025 (02:47):
Okay.
squadcaster-a956_1_05-29-20 (02:47):
cap tables.
Yeah, exactly
emily-sander_1_05-29-2025_ (02:49):
into our topic for today, which,
which is investment dilution.
Let's start with like a basic,basic definition and example.
So company issue shares theirinitial round of shares,
subsequently company issues,additional round of shares.
Therefore, if you own a certainamount of shares, you now own a
(03:13):
smaller percentage of thecompany.
Is that a working definition?
squadcaster-a956_1_05-29-2025 (03:17):
I mean in, that exact way of
stating it.
That's right.
Yeah.
If you have the same number ofshares and the company issues
more shares to other people,then you own less of the company
by virtue of havingproportionally less.
Piece of the pie.
That's the way to think about it
emily-sander_1_05-29-2025 (03:35):
Okay.
squadcaster-a956_1_05-29-20 (03:36):
you know, if, if you, if you have a
bigger slice of the pie, um, andmore pie is somehow created and
given away than you have lessthan you had before.
Yeah.
And that's generally not a goodthing.
I mean, you know, I'd saycategorically speaking, dilution
isn't good generally.
ed-barton---it-_1_05-29-2 (03:57):
Yeah, there's a, the argument is
always made that it's like,well, you gotta smaller piece of
a bigger
squadcaster-a956_1_05- (04:02):
Exactly.
Yeah.
ed-barton---it-_1_05-29-20 (04:03):
that bigger pie might, and that
smaller piece might not be as,might not be the right
squadcaster-a956_1_05-29 (04:10):
Right.
ed-barton---it-_1_05-29-2 (04:10):
split for you.
You might be hungry.
squadcaster-a956_1_05-29- (04:13):
Yeah.
ed-barton---it-_1_05-29-20 (04:13):
With that split.
squadcaster-a956_1_05-29- (04:14):
Yeah.
emily-sander_1_05-29-2025_15 (04:15):
So we alluded to this in our last
podcast episode.
We were talking about the captable and debt and equity and
mezzanine and all that goodstuff.
And we were kind of goingthrough the se, the sequence of
this stuff, and you two wereboth mentioning it.
And at this point you getdiluted and at this point the
original investors would getdiluted.
And so we thought this would bea good topic, but where does
(04:36):
this come into play in real lifefor investors, for pe, for VC
funds?
We've kind of talked about awhole bunch of these things.
squadcaster-a956_1_05-29- (04:44):
well, I'll tell you where it doesn't
come into play, which is areally good place to be if you
can manage your way through itis to bootstrap your business so
that you're not giving away.
Pieces of your company to takeon outside capital.
Like so your business, forexample, Emily, you haven't
taken on other investors, so youown all of your business,
therefore, you're notexperiencing any dilution, you
(05:05):
know, and presumably never will,which is the way to be.
And there are a lot of examplesof that out there where big
companies that you hear abouttoday been around for a long
time, they've just never takenon outside capital because you
know, they've had.
You know, growth andprofitability out the gate and
they'd never had to do it.
And I think really that comesdown to the choice to take on
(05:28):
external capital, take on otherbusiness partners, um, raise
more money, you know, equityspecifically.
Um.
That's where you have to decidewhether, you know it's worth it
to be diluted or give up of whatyou've built and, you know, give
that away forever basically.
Unless you buy it back someday.
But, you know,
emily-sander_1_05-29-2025 (05:48):
When, when would you have to make that
decision?
squadcaster-a956_1_05-29- (05:51):
well, a lot of companies look at it
when they're close to runningoutta capital.
Um, that's, that's usually aplace where you pretty much are,
your hand is kind of forced.
say, darn it, you know, I'd loveto bootstrap this thing, but I
can't.
And so I need to go ahead andtake on an investor, and I know
I'm gonna have to give up apound of flesh for that
ed-barton---it-_1_05-29-2 (06:10):
Yeah,
squadcaster-a956_1_05-29-20 (06:11):
Um,
ed-barton---it-_1_05-29-202 (06:12):
the
squadcaster-a956_1_05-29- (06:13):
yeah,
ed-barton---it-_1_05-29-2025 (06:13):
to get money is when you need it.
squadcaster-a956_1_05-2 (06:15):
exactly right.
That is exactly right.
ed-barton---it-_1_05-29-2 (06:18):
worst time to get money is when you
need it,
squadcaster-a956_1_05-29- (06:20):
Yeah.
ed-barton---it-_1_05-29-202 (06:20):
you lose your negotiating leverage.
squadcaster-a956_1_05-29-2 (06:22):
Yep.
ed-barton---it-_1_05-2 (06:23):
dilution in some cases.
I, I mean, I agree with Rory in,in a general sense in that if
you can bootstrap your businessto the point where you can sell
it and do that without takingexternal money, more power to
you, and that's, that's gonna beyour best choice.
Um.
achieve, if that's your strategyand that's what the goal you
(06:44):
want to achieve.
Most businesses that, you know,if you look at a Facebook or you
look at, you know, Mo, even mostof your public businesses, they
haven't been bootstrapped.
They've had folks
squadcaster-a956_1_05-29 (06:51):
Right.
ed-barton---it-_1_05-29-202 (06:52):
and each round that folks come in,
the, the leverage changesdepending on how successful the
business
squadcaster-a956_1_05-2 (07:02):
Mm-hmm.
ed-barton---it-_1_05-29-2 (07:02):
take, you could go, if you have a
really successful business, youcan go out and raise capital
squadcaster-a956_1_05-29- (07:07):
Yeah.
ed-barton---it-_1_05-29-202 (07:07):
and actually it's gonna cost the
investor a lot.
And so the dilution is gonna beless.
Really, the, the goal is alwaysgo out for capital when you
don't need
squadcaster-a956_1_05-2 (07:16):
Mm-hmm.
ed-barton---it-_1_05-29- (07:17):
always have an overperforming business
so that you can have a beautycontest and a competitive
environment for your capitalround.
And if you're not, if you're inout there like hat in hand
begging for, you know, beggingfor your capital, that's when
you're gonna get the, that'swhen the dilution is
squadcaster-a956_1_05- (07:34):
Exactly.
ed-barton---it-_1_05-29-20 (07:34):
that cheap, that cheap cocktail.
You talked about really bad.
I.
emily-sander_1_05-29-2025_ (07:38):
What did you mean?
What did you mean?
When the investor has to pay,pay, pay for it.
squadcaster-a956_1_05-29- (07:44):
Well, it just means if you have, uh,
we'll use a real example here,Amazon, um.
You know, Jeff Bezos is largelythought of as pretty savvy,
savvy business person becausewhenever he had taken on money,
new money, external capital,like what Ed's saying it was
when there was a lot of demandto be part of that growth
(08:04):
journey.
So when an investor is trying toget into like a hot stock or
something like that, you end uppaying a premium for that.
And same thing goes in privatebusinesses you're issuing
private classes of shares, whichis to say.
If you have a lot of demandlined up, you can dictate the
terms to the investors for whichthey come in.
So you might give up a verysmall slice of your company to
(08:28):
take on a lot of money.
emily-sander_1_05-29-2025 (08:30):
Okay.
squadcaster-a956_1_05-29-2 (08:30):
flip side, the the opposite of that,
what we're talking about, wherebad if you need the capital and
the investor knows you need thecapital and that they're the
critical path to that, you mighthave to give up a lot of your
company.
to get the kind of capital youneed to keep growing the
business.
Um, and not only beyond thefinancial aspects of owning less
(08:53):
of your company, of coursethere's also control aspects.
You know, you want to, I mean,as a founder, you know,
management team, what have you,uh, you know, maintaining as
much of a control position aspossible.
And that's generally based on.
The proportion of the companythat you own, you get to be more
of the decision maker.
You get to be more control ofthe board seats, things like
(09:16):
that.
Mark Zuckerberg's anotherexample of somebody that's
managed to do that very wellover time, and that's a function
of what we just talked aboutwas, you know, that's a company
that everybody wanted to be partof and so you know, they get a
pick and choose.
they bring in and dictate theterms to the investors, and
probably most of those investorsare pretty happy right now if
(09:37):
they came in early on thatbusiness, no matter what the
terms were that they had to signup for.
emily-sander_1_05-29-2025_15 (09:41):
If a founder can, can a founder do
anything at the beginning toprevent their shares from being
diluted?
squadcaster-a956_1_05-29- (09:47):
Yeah.
ed-barton---it-_1_05-29-202 (09:48):
Um, yeah, and I think one of the
things Rory talked about with,with Zuckerberg was they had
multiple classes of
squadcaster-a956_1_05-29- (09:55):
There you go.
Yep.
ed-barton---it-_1_05-29-2025 (09:57):
so the, there's founder shares
squadcaster-a956_1_05-29-2 (09:59):
Yep.
ed-barton---it-_1_05-29-20 (09:59):
like a.
One share gets 40 votes,
squadcaster-a956_1_05-29 (10:02):
Right.
ed-barton---it-_1_05-29-202 (10:03):
and then there's the investor shares
where one share gets one vote.
squadcaster-a956_1_05-29- (10:07):
Yeah.
ed-barton---it-_1_05-29-202 (10:07):
And so even though the founders may
have diluted themselves to 30%of the ownership, they still
have a majority or a supermajority of the voting interests
so that they can control theboard of directors, they can
control the, they, they maintainthat control that Rory was
talking about.
Now you're gonna trade.
When you do that, you're gonnatrade.
(10:28):
Um, generally for value.
So it's, there's gonna be a costassociated with setting some of
those things up.
But the key thing that a personcan do or that a founder can do
to actually prevent themselvesfrom being diluted is to have an
overperforming business and havea strong competitive fundraising
round where you've got multipleplayers.
'cause those multiple playerswill go, I want to
squadcaster-a956_1_05-29- (10:50):
Yeah.
ed-barton---it-_1_05-29-202 (10:51):
and I'm gonna value your business at
a hundred million.
And then the next one goes, I'mat one 10, or I'm at one 20, or
I'm at one 30.
And you get super majorityvoting interest.
And so you, you drive that andthat's where your investment
banker also is gonna be able tokind of bring their forces to
bear if they're worth theirsalt, to make sure you get that
maximized.
squadcaster-a956_1_05-29-20 (11:10):
And the reason why this sort of
delineation of slicing the pieinto play so much with earlier
stage businesses, um, ratherthan, let's say a private equity
company coming in is, is reallygenerally speaking when a
private equity company mostlycomes into the picture.
I shouldn't say mostly.
In, in, in a lot of cases,they're buying the entire
company.
So it's like the, you're, you'rejust basically saying, okay, I
(11:32):
want the max value for mybusiness and I'm gonna have a
competitive process to get thatmax valuation.
In a case like this, oftentimesearlier stage businesses are
selling off minority pieces oftheir business, but they want to
maintain as much of the pie asthey can for how much they're
selling, uh, how much moneythey're raising.
They want to give up as littleas possible.
(11:52):
In the case of the privateequity game, it's more like I, I
already know I wanna sell ahundred percent of my company.
I just want to get the max valuefor that.
emily-sander_1_05-29-2025 (12:00):
Okay, so what about when a private
equity company sells to anotherPE company?
Did does the first PE company'sshares get diluted?
ed-barton---it-_1_05-29-202 (12:13):
No, and you don't tend to see that.
It tends to be a full sale, likeRory said.
But where you do see that is onthe venture
squadcaster-a956_1_05- (12:19):
Exactly.
Yeah.
ed-barton---it-_1_05-29-20 (12:20):
have venture round a
squadcaster-a956_1_05-29-20 (12:21):
Mm.
ed-barton---it-_1_05-29-2 (12:22):
might have a smaller venture capital
firm that's backed it, and thenyou gotta go, oh crap, we're
not, oh crap.
It's a good problem.
We're growing so rapidly.
we need to go out and raiseadditional rounds, and instead
of going to a small venturefund, we're gonna go to Madrona,
or we're gonna go to KleinerPerkins, or we're gonna go, you
know, one of the big boys.
squadcaster-a956_1_05-29- (12:40):
Yeah.
ed-barton---it-_1_05-29-2 (12:41):
those big boys are gonna come in and
they're gonna dilute.
folks in Round A,'cause you'regetting additional money comes
in so the pie gets bigger.
guys go, well, I'm gonna, I'mgonna write a check for a
billion dollars.
But that billion dollars isn'tgoing out to the other
shareholders.
In normal cases, it's going intothe business.
(13:01):
And so the businesses has a pre.
squadcaster-a956_1_05-2 (13:04):
Mm-hmm.
Mm-hmm.
Yep.
ed-barton---it-_1_05-29-202 (13:06):
And then it has a post money value,
which is the value of the biggerpie, plus the opportunity cost
plus the the growth opportunitythat's built into that
additional money.
And that's where yournegotiation is, is what's,
what's my pre-money value, mypost money value?
And how much of that post moneyvalue does do the original
shareholders or do theshareholders before that round
(13:29):
because they're gonna getdiluted with that in that post
money scenario.
squadcaster-a956_1_05-29-2 (13:33):
Yep.
emily-sander_1_05-29-2025_ (13:35):
Yes.
Okay.
So it might happen more commonlyin the VC rounds, but we did
mention last time that one ofthe exit strategies is to sell
to a PE firm, and that's in ourbook.
So in those situation, is itlike they're just buying the
whole thing again, so it doesn'treally matter?
squadcaster-a956_1_05- (13:48):
exactly.
ed-barton---it-_1_05-29-20 (13:49):
the, the original P firm.
Unless they do a sidecar orsomething along those lines,
which again, is, is more like aVC where the original fund is
going.
We still want to, we still wantto come in, but we want
additional equity.
They may not be in a positionwhere that fund has additional
equity to contribute.
I.
You know, so that that privateequity fund is kind of tapped
(14:10):
out or they're not making newinvestments, they're returning
capital to shareholders.
They want to, or to, to limitedpartners.
They want to be able to make anadditional, or that business
needs additional capital.
They may have a second privateequity firm come in at that
point, you're, you and it'sprimary capital going into the
business as opposed to buyingout
squadcaster-a956_1_05-2 (14:28):
Mm-hmm.
ed-barton---it-_1_05-29- (14:29):
buying off.
At that point you may have, um,some dilution, but that's a,
that's a not a extraordinarilycommon transaction.
emily-sander_1_05-29-2025 (14:37):
Okay.
Are there like some, there'sgotta be some absolute horror
stories out there of people whojust got washed out and they
didn't like, didn't do anythingwrong per se.
They just didn't know how itworked or they just.
ed-barton---it-_1_05-29-20 (14:48):
I'll give you
squadcaster-a956_1_05-29- (14:49):
Yeah, absolutely.
ed-barton---it-_1_05-29- (14:50):
here's the worst horror story.
You have folks that get dilutedfrom control to non-control,
they've got 49% of the businessand they control nothing and
they can't get their money out.
So, so they end up going, oh,well I'm going to, so I'm a
founder, I've built a reallynice business.
It might be doing, you know,seven, 7 million, 8 million of
(15:11):
ebitda.
gonna come in and I know I needsome additional equity, so I'm
gonna come in and you raise a$50million of primary equity to
come into the business, inreturn, you're giving up 51% or
60% of the business to do that.
then six months into it.
(15:32):
The VC goes, you're not theright executive for us.
We want somebody different.
You're going to, you know,you're out.
Nothing you could do except yourentire net worth is stuck in
that
squadcaster-a956_1_05-29-2 (15:44):
Tied up in that business.
ed-barton---it-_1_05-29- (15:45):
likely stuck with a board seat that
doesn't have any control, makesyou a fiduciary of the business.
So you can't compete, you can't,I mean, you're, you, you could
end up like in a real, that'sthe horror
squadcaster-a956_1_05-29- (15:56):
Yeah.
ed-barton---it-_1_05-29 (15:57):
There's a horror story where like, my
business is distressed.
And I dilute, it gets, and I getdiluted down to zero
squadcaster-a956_1_05-29 (16:03):
Right.
ed-barton---it-_1_05-29 (16:03):
because of caps stack.
You know, they, they throw on apreferred or they throw on, you
emily-sander_1_05-29-2025_ (16:07):
Down to zero though.
ed-barton---it-_1_05-29-2025 (16:09):
to zero, effectively, economically
down to zero.
But the, that's almost betterthan to be stuck at like 49% and
not have any control and haveall your money tied up and you
can't compete and you're stuckkind of sitting on the
sidelines.
That, that to me is like.
That's, that's horrible.
squadcaster-a956_1_05-29- (16:31):
Yeah.
ed-barton---it-_1_05-29-202 (16:32):
And I've seen that.
I've also seen folks diluteddown to zero because the, know,
they basically were in distressand they,
squadcaster-a956_1_05-29- (16:40):
Yeah.
ed-barton---it-_1_05-29-2 (16:40):
said, yeah, we need additional
private, or we need additionalcapital.
And they said, look, putadditional capital and it's
gonna be, you know, preferred.
So that's good.
squadcaster-a956_1_05-29- (16:48):
Yeah.
ed-barton---it-_1_05-29-202 (16:49):
you may, you can have your comment
all you want.
You know, it kind of comes backto the capital stack discussions
we talk about in, in, uh.
In our, in our book or on a fewof these other podcasts where
they may have, from a commonstock perspective, they may not
experience dilution at all.
They may hold all the commonstock still, economically
squadcaster-a956_1_05-29-20 (17:08):
but may never see of day.
Yeah.
emily-sander_1_05-29-2025_15 (17:11):
So there's kind of like, there's
different levels to think aboutthis on.
It's not just the financial,although that's important to a
lot of people.
There's, you mentioned like thevoting rights.
So the control, like you haveinfluence, you have a say, you
can make decisions versus like,I may be the founder of the
company, but now I'm like abound pigeon.
I can't do anything because I.
squadcaster-a956_1_05-29-202 (17:28):
It says your baby, that you're now
basically and watching somebodyelse raise that, baby into a
child or, or, you know.
Taking it.
I, I mean, a lot of times what Isee with founders is when that
happens and they give upcontrol, it's like the business
goes a completely differentdirection or something like
(17:49):
that.
And that, that is the hardestthing for them to deal with
because they conceived of it.
They, you know, got it to acertain point and now they can
really do nothing more about itbecause of the way they've been
structured out of the business.
emily-sander_1_05-29-2025 (18:01):
Yeah.
squadcaster-a956_1_05-29- (18:01):
alas, there are ways in which you can
avoid being diluted.
Sometimes it's costly.
Of course, you know, you can.
Have preemptive rights tocontribute more capital and
later around so that you cankeep a proportional share.
Now, easy for somebody to say,but if you're not a, you know,
billionaire or something likethat already, and you know,
you're at, you're raisinganother large funding around,
that's hard to kind of keep upwith.
(18:23):
So I, you know, that's, there'slevels of practicality to
emily-sander_1_05-29-2025_1 (18:26):
But how would that work?
Just in theory?
squadcaster-a956_1_05-29- (18:28):
Well, let's say, you know, you, you
have a, I don't know, 50%position in your business today.
And you go, you need to raiseanother$50 million.
That would mean that you wouldneed to put up the next 25 to
keep that position basically to,to maintain 50% ownership.
So that's real simple math, butbut you can imagine with big
(18:49):
numbers, that means you actuallyhave to come up with a lot of
capital yourself.
ed-barton---it-_1_05-29-2 (18:54):
Yeah,
emily-sander_1_05-29-2025_1 (18:54):
Is, is there any clause or any
preemptive thing you can dowhere I get to retain my
percentage and then I get, I, Ican, I have to buy it, but at
like a cheaper price, like Iwon't have.
ed-barton---it-_1_0 (19:07):
negotiable.
squadcaster-a956_1_ (19:09):
negotiable.
Yeah, it's all been done.
ed-barton---it-_1_05-29-202 (19:11):
are premised on your leverage and
your leverage
squadcaster-a956_1_05 (19:15):
Leverage.
ed-barton---it-_1_05-29-20 (19:15):
upon the, the condition of the
business and how much you needthe capital and how much
competition
emily-sander_1_05-29-2025_150 (19:19):
S
ed-barton---it-_1_05-29-2025 (19:20):
to
emily-sander_1_05-29-2025_15 (19:20):
So in the scenario where you're
doing well and like investorswant to be a part of it, and
you're like, okay, you, you canpay for it.
You could set up like, okay, I'mgonna let you in, but also just
know that I'm gonna retain myvoting rights.
I'm gonna retain my sharedposition, and I'm gonna give
myself the option to keep thatshare position at like a lower
(19:41):
cost per share if it gets tothat.
ed-barton---it-_1_05-29-2 (19:43):
you'd better be performing like, you
know, fricking Mikhail Nik off,you know, on, because you ain't
gonna be getting that kind ofdeal on, on a typical, even an
atypical, uh, that's, that wouldbe exceptional.
That would be like.
Well once a once a decade typeof type of deal You just talked
emily-sander_1_05-29-2025 (20:04):
Okay.
Ed Ed's saying funny names, butdo we have like some success
stories of like how to dodilution well, or like, Hey,
this is like if you do dilution,this is how you wanna do it.
squadcaster-a956_1_05-29-20 (20:15):
Um, yeah, I mean, I think there's.
sorts of success stories.
I, I guess the couple that, youknow, we've talked about a
little bit earlier, you know,Amazon and Facebook, and that
comes down to those businesseshaving all the leverage.
And so their founder ownersbasically maintain control and
insane amounts of wealth throughthe, through the process of
(20:37):
taking all their money.
Uh, the other thing I think it'sworth talking about is this
isn't just applied to folks thatare founders or, you know,
emily-sander_1_05-29-2025_ (20:45):
Hmm.
squadcaster-a956_1_05-2 (20:46):
initial investments.
From a capital standpoint also,you know, there's generally,
with a lot of these earlierstage businesses, there's
employee pools of stock.
So one of the things that ifyou're working for one of these
and you get grants and stuff upfront, you know, you'd have to
be thinking down the road of tosay, okay, how many other
funding rounds were there gonnabe in this thing before the
exit?
(21:06):
Which is what everybody's kindof building for.
you have to be careful and youmaybe try to ensure that you,
you know, the employee poolitself doesn't get diluted,
right?
Let's say an employee poolrepresents 15% of the stock at a
certain point of time.
For you as an employee that'sgot a vested interest in this,
this stuff, literally, literallyvesting interest.
(21:28):
You wanna make sure that thatemployee pool stays at that 15%
or greater if you, again, if youhave leverage.
Maybe it becomes 20, who knows?
But you, what you don't want tosee is it become down to five.
So, you know, your Max grant isgonna be, you know, presumably
less and less, and you're gonnabe working more and more and
harder and harder the, thefurther this thing goes.
So that's something to really ofif you, if you base your future
(21:52):
outcome on stock-basedcompensation.
emily-sander_1_05-29-202 (21:55):
That's a really good point.
'cause then your employees couldjust get totally just
discouraged and like, all right,well my, you know, my retirement
plan.
squadcaster-a956_1_05 (22:04):
employees are what makes companies happen
and makes, makes things go for abusiness.
So I, you know, I don't, I, it'sfairly rare where I feel like
the, you know, even, you know,changing of the guard bringing
in investors, they don't want tosee the employees, just like you
say, totally pissed, you know?
So there's usually a, a balanceto strike there, but it is just
(22:24):
something to be mindful of
ed-barton---it-_1_05-29-2 (22:26):
Yeah,
squadcaster-a956_1_05-29- (22:26):
your, your own pot of things
shrinking.
ed-barton---it-_1_05-29-2025_ (22:28):
a lot of times what I've seen is
you have the.
The option pool
squadcaster-a956_1_05-29- (22:32):
Yeah,
ed-barton---it-_1_05-29-20 (22:33):
stay at 10%.
squadcaster-a956_1_05-29- (22:34):
yeah,
ed-barton---it-_1_05-29 (22:34):
before, but it's, and it's 10% now.
So you have new options.
squadcaster-a956_1_05-29- (22:37):
yeah.
ed-barton---it-_1_05-29 (22:38):
options are issued, but they're issued
at the new valuation so that,that
squadcaster-a956_1_05-29 (22:41):
That's right.
Yep.
That's right.
ed-barton---it-_1_05-29-202 (22:43):
you know, kind of the ups from that
point forward.
So the, the original options arediluted, but they're at a lower,
but they're at a lower, they'reat a lower valuation.
So they've got, they've stilllocked in that value.
squadcaster-a956_1_05-29- (22:56):
Yeah.
ed-barton---it-_1_05-29- (22:56):
Locked in the value.
squadcaster-a956_1_05-29- (22:58):
Yeah.
ed-barton---it-_1_05-29-202 (22:58):
see it until you leave.
Um, and the exit happens, butthey get, the pool stays at 10%,
but all the new options are atthe new higher valuation.
So you've gotta earn, you've
squadcaster-a956_1_05-29- (23:08):
Yeah, it's all about timing.
I'm like just chuckling tomyself here, being reminded
that, you know, a company Iworked for at one point in time,
I joined the company was reallystoked.
'cause I got, you know, I gotoptions in it and stuff.
But then I later learned that mystrike price on my options went
up like almost four to four x.
What it was like the monthbefore the company got revalued
(23:29):
from a much lower valuation.
had I started earlier, I'd getat the exit, which did happen.
I would've gotten like fourtimes my
emily-sander_1_05-29-2025_1 (23:37):
no.
squadcaster-a956_1_05-29-20 (23:38):
But hey, say Lavie, that's how it
goes.
You know,
emily-sander_1_05-29-202 (23:41):
Timing is everything.
squadcaster-a956_1_05-29-2 (23:42):
days I'll end up on the right side of
those deals.
emily-sander_1_05-29-202 (23:45):
Timing is everything in lots of areas
of life.
Yes.
squadcaster-a956_1_05-29-20 (23:49):
is.
Yep.
emily-sander_1_05-29-2025_ (23:49):
Just outta curiosity, is there any
way that, uh, share would getwhat is the opposite of diluted,
concentrated?
Where to actually be worth more?
squadcaster-a956_1_05-29-20 (23:59):
Mm,
ed-barton---it-_1_05-29-2025_ (24:00):
i I haven't seen a lot of that.
You do have situations where youcan have share buybacks.
I mean, you see that more withpublic companies where if
squadcaster-a956_1_05-29-20 (24:07):
for sure.
ed-barton---it-_1_05-29- (24:07):
excess cash and they go, okay, we're
gonna buy back some equity.
Um, you can see that sometimes,I suppose in like a private
equity setting where you retirepreferred.
So it may be convertiblepreferred that gets retired, and
then with cash and then yourcommon stock now that you don't
have those.
Conversion rights hanging outthere ends up more concentrated,
(24:30):
but it's rare because again, thewho's gonna be the seller, the
time where you might, you know,at the, at the concentration
point.
So where, where you would tendto see it is more the people
leave.
I mean, this is one that I haveseen over and over again.
So kind of on the flip side ofthat is you have a 10% employee
pool that's all been issued,that means the other folks have
(24:53):
a 90% interest.
And then all those employeesquick get fired, whatever, and
squadcaster-a956_1_05-29- (24:57):
Yeah.
ed-barton---it-_1_05-29-2025 (24:58):
of the employee pool.
They don't reissue the other 6%.
So that means that, that,
squadcaster-a956_1_05-29- (25:02):
Yeah.
ed-barton---it-_1_05-29-20 (25:03):
that essentially concentrated, um,
the balance, but it's normallynot a, you know, that, that's
around the margins.
And that's, and that's fairlytypical that you've got an
employee pool that's not fully,fully out, invested.
squadcaster-a956_1_05-29-20 (25:16):
The point here is that it's also
fungible and like over timethese things, you know, move
around a lot.
So you just need to know whatlevers to watch out for and to,
to think about.
Um, so that you, you understandwhat's at stake at every point
in time when you're getting anew round of funding or
something like that.
Structure means everything here,you know?
(25:38):
Um, and I think like the balanceof strike, right?
If you're a founder perhaps, andyou're thinking about whether to
take on capital or not, andlet's say in a scenario, you,
you, you could somehow maintainyour control.
You just really need to thinkabout, okay, the whole point of
taking on more capital is toexpand the size of the pie.
Well.
You know, if I expand the pieand even if my slice of the pie
(26:00):
gets smaller, will I be betteroff in this scenario or not?
You know, assuming you know you,you like the partner and all
this other stuff, you just haveto think economically and say,
okay, know, does, does taking onmore money lead to a overall
better outcome?
Even if I have less of a shareof the company?
And I think, you know, whenpeople take on those rounds of
(26:20):
funding, that's what they cometo the conclusion on.
It's like, yes, that is betterfor me.
That is better for the company.
ed-barton---it-_1_05-29-202 (26:25):
the additional funding, the
additional cash reduces the riskpremium.
squadcaster-a956_1_05-29- (26:28):
There we go.
There we go.
we go.
Risk premium.
ed-barton---it-_1_05-29-2025_ (26:32):
I
squadcaster-a956_1_05-29- (26:33):
Yeah.
ed-barton---it-_1_05-29-202 (26:33):
RIS premium in.
I've been, I've been waiting.
squadcaster-a956_1_05-29- (26:36):
Gonna turn this into a drinking game.
ed-barton---it-_1_05-29-20 (26:37):
our, our subscribers are gonna have
the risk premium drinking gameevery time that says risk
premium,
squadcaster-a956_1_05-29-202 (26:42):
So true.
Yeah.
Yeah.
emily-sander_1_05-29-2025_15 (26:44):
as you go through the rounds of
funding, who is the one makingthe decision of whether or not
to dilute the shares or not?
Is it like the majority party,
squadcaster-a956_1_05-29-20 (26:52):
The board of directors.
emily-sander_1_05-29-2025_1 (26:53):
but it's like the majority?
ed-barton---it-_1_ (26:56):
effectively, but
squadcaster-a956_1_05-29- (26:57):
Yeah.
Yeah.
ed-barton---it-_1_05-29- (26:58):
again, you could have a situation where
the majority, the majority use aFacebook example, the majority.
It could not be, could not havea majority of the board, because
they don't have a majority ofthe votes.
They've got a majority of the
squadcaster-a956_1_05-2 (27:11):
Mm-hmm.
ed-barton---it-_1_05-29-202 (27:12):
And so it's, it's a,
squadcaster-a956_1_05-29- (27:13):
Yeah.
ed-barton---it-_1_05-29-202 (27:14):
the board of directors makes that
decision.
again, the board of directors istasked with fiduciary
responsibility to, to make, youknow, the company perform as, as
best it can and the act in thebest interest of the company,
which includes the shareholders.
squadcaster-a956_1_05-29-2 (27:26):
Yep.
ed-barton---it-_1_05-29-202 (27:27):
So,
squadcaster-a956_1_05-29-2 (27:27):
And, and typically founder and or CEO
is, you know, not only on theboard, but typically the chair
person of the board too.
So, you know, you, you haverepresentation at that level
from the operating business aswell as other investors and
outside advisors.
emily-sander_1_05-29-2025_1 (27:43):
But that's where, in the example we
gave earlier, where foundermaybe gave up the financial.
Shares, but kept the majority ofthe voting rights, then that
founder could decide, we'reactually not gonna dilute this
further because I'm gonna voteagainst that.
ed-barton---it-_1_05-29-2025 (27:59):
Or
emily-sander_1_05-29-2025_1 (28:00):
And
ed-barton---it-_1_05-29-2 (28:00):
gonna get certain terms,
squadcaster-a956_1_05-29- (28:01):
Yeah,
emily-sander_1_05-29-2025 (28:02):
yeah.
Okay.
ed-barton---it-_1_05-29-20 (28:03):
the,
emily-sander_1_05-29-2025 (28:04):
there any other like levels to think
about, there's like financial,voting rights, are there other,
other kind of levers to pull.
squadcaster-a956_1_05-29- (28:10):
Well, before we do that, I think this
is, I just wanted to connectthis back to a really important
thing.
If you're a founder, it's worthnot getting screwed by working
with an advisor to help youthink through these things.
Because again, you oftentimes,you're dealing with investors
that all they do every day iscap tables to their advantage.
(28:33):
I, you know, I think some of thehorror stories we could drum up
have to do with founders beingnaive or being told something.
when, you know, you look at thefine print, it's not what it
seems.
So, like, as we've talked aboutin our book, and, you know,
strongly advise here is, youknow, get a circle of trust
around you, whether it's legaladvisors or financial advisors,
et cetera, that can help younavigate the complexities of
captive.
(28:53):
I'm A CFO for crying out loudand these things are complex and
sometimes make my mind, youknow, bend.
So, it's worth the time.
It's worth the money.
It's worth the of mind knowingthat you got somebody else
looking at it with you.
It has your interest at heart'cause you're paying them
likely, you know?
So,
emily-sander_1_05-29-2025_ (29:11):
Yes.
Alright.
Exit question time.
squadcaster-a956_1_05-29-2 (29:15):
Ooh, okay.
emily-sander_1_05-29-2025 (29:16):
Let's do a couple, couple rounds.
Lightning round here.
Finish this sentence.
You know, you're about to getdiluted when,
squadcaster-a956_1_05-29-20 (29:25):
You are running outta capital and
you're needing to go ask formore.
ed-barton---it-_1_05-29 (29:29):
There's an LOI on the table.
squadcaster-a956_1_05-29 (29:31):
You're right.
It's that simple.
Yeah.
Yeah, yeah,
emily-sander_1_05-29-2025_1 (29:35):
if.
squadcaster-a956_1_05-29- (29:36):
yeah.
Especially if you haven'talready negotiated it, but yes.
Yeah.
emily-sander_1_05-29-2025_15 (29:39):
If equity dilution were a dating
relationship, what stage wouldit be in the honeymoon, the
breakup, or the complicatedmiddle?
ed-barton---it-_1_05-29-202 (29:47):
If, if, if equity dilution was, oh,
it's a complicated middle.
squadcaster-a956_1_05-29-202 (29:52):
It is complicated.
ed-barton---it-_1_05-29 (29:53):
middle.
squadcaster-a956_1_05-29- (29:54):
Yeah.
ed-barton---it-_1_05-29-20 (29:54):
the, it's like the.
We don't want to talk to eachother part of the
squadcaster-a956_1_05-29- (29:58):
Yeah.
ed-barton---it-_1_05-29-202 (29:58):
but I'm stuck in it.
squadcaster-a956_1_0 (30:00):
Mediation.
Pretty much.
Yeah.
emily-sander_1_05-29-2025 (30:01):
Gosh.
All right, last one here.
Dilution in three words go,
squadcaster-a956_1_05-29- (30:12):
Three words.
ed-barton---it-_1_05-2 (30:12):
managed.
squadcaster-a956_1_05-29- (30:14):
Yeah.
Avoid if possible.
emily-sander_1_05-29-2025_1 (30:21):
but could be good.
squadcaster-a956_1_05- (30:22):
forever.
emily-sander_1_05-29-2025 (30:23):
Could be good.
squadcaster-a956_1_05-29-20 (30:24):
two words actually.
emily-sander_1_05-29-2025_1 (30:27):
CFO can't count.
squadcaster-a956_1_05 (30:28):
Bootstrap forever.
Damnit.
emily-sander_1_05-29-2025_1 (30:31):
You can hyphenate, bootstrap, and
stretch it out if you needed to.
Alright.
squadcaster-a956_1_05-29-20 (30:35):
I'm all, I'm very familiar with, you
know.
Capital markets and, you know,different types of the cap
table.
But at the end of the day, I amjust gonna say, just, just fund
it all yourself if you can.
Don't worry about the otherstuff.
Maybe take on some debt and makethat efficient for yourself.
But, you know,
emily-sander_1_05-29 (30:51):
Beautiful.
squadcaster-a956_1_05-29-2 (30:52):
fund it yourself.
emily-sander_1_05-29-2025_1 (30:54):
and now we know more about dilution.
squadcaster-a956_1_05-29-202 (30:56):
We do.
Yeah.
emily-sander_1_05-29-202 (30:57):
Thanks Ed.
Thanks Rory.
Catch you next time.
squadcaster-a956_1_05-29- (30:59):
Yeah, talk soon.
ed-barton---it-_1_05-29-2 (31:01):
Thank you.
Quiet and distant is always how I
describe Ed Barton.
My goodness, definitely notFoghorn.
And what is the opposite ofdistant,
ed-barton---it-_1_05-2 (00:45):
Foghorn.
emily-sander_1_05-29-202 (00:46):
nearby engaged.
Alright, here we go.
Locked in.
We are locked in and ready to goon the Private Equity Experience
podcast and
squadcaster-a956_1_05-29-2 (00:58):
are.
emily-sander_1_05-29-2025_1 (00:58):
our kickoff question.
I'm gonna go.
I'm gonna go to Rory.
Rory, when you used to drink
squadcaster-a956_1_05-29-2 (01:07):
Hmm.
emily-sander_1_05-29-2025_15 (01:07):
at least more than you do now,
would you go for the strong shotthat burns or a watered down
cocktail that lasts all night?
ed-barton---it-_1_05-29-202 (01:16):
Oh.
squadcaster-a956_1_05-29-20 (01:17):
Oh, I think you know the answer to
that.
I'd go, I'd go strong and.
Hard hitting quickly, generallyspeaking.
Uh, yes.
Yeah, very much a used to be awhiskey guy.
Um, so, you know, the higher theproof, the better back in the
day.
Um, Yeah, definitely
emily-sander_1_05-29-2025_ (01:36):
Rory may or may not have drank to the
point of like lights out
squadcaster-a956_1_05-29- (01:41):
yeah,
emily-sander_1_05-29-20 (01:42):
nights.
Yeah.
squadcaster-a956_1_05-29 (01:43):
times.
More than a few times.
Yeah,
emily-sander_1_05-29-2025_1 (01:46):
Mr.
Barton,
squadcaster-a956_1_05-29-20 (01:47):
and had a little more constitution.
Now that would, that'd be,that'd be a real problem for
emily-sander_1_05-29-2025 (01:52):
would you be down for the count for
like days if you did that?
squadcaster-a956_1_05-29- (01:55):
Yeah.
Yes.
The hangover effect is really adeterrent for me, uh, in so
emily-sander_1_05-29-2025 (02:01):
Yeah.
squadcaster-a956_1_05-29-20 (02:01):
of, of consuming alcohol.
Yeah.
emily-sander_1_05-29-202 (02:06):
Edward Barton.
Is there any car fluid thatactually gets better when you
dilute it, or is it always a badidea or a last resort situation?
squadcaster-a956_1_05-29-202 (02:16):
my gosh.
ed-barton---it-_1_05-29-202 (02:17):
any car fluid that gets blinker
fluid gets better when youdilute
emily-sander_1_05-29-2025_1 (02:21):
Oh.
squadcaster-a956_1_05-29-2025 (02:24):
I didn't know there was such a
emily-sander_1_05-29-2025_15 (02:26):
Me neither are you?
Are you making this up?
squadcaster-a956_1_05 (02:28):
actually.
emily-sander_1_05-29-2025_1 (02:29):
God bless, blinker fluid.
What the hell?
squadcaster-a956_1_05-29- (02:35):
Yeah.
emily-sander_1_05-29-2025_1 (02:36):
All right.
squadcaster-a956_1_05-29 (02:37):
that's that's classic.
ed-barton---it-_1_05-29 (02:38):
Nothing gets better diluted, whether
that's
squadcaster-a956_1_05-29 (02:41):
segue.
ed-barton---it-_1_05-29-2025 (02:43):
or
squadcaster-a956_1_05-29-2 (02:44):
Hmm.
ed-barton---it-_1_05-29-202 (02:45):
car fluid or your cap
emily-sander_1_05-29-2025 (02:47):
Okay.
squadcaster-a956_1_05-29-20 (02:47):
cap tables.
Yeah, exactly
emily-sander_1_05-29-2025_ (02:49):
into our topic for today, which,
which is investment dilution.
Let's start with like a basic,basic definition and example.
So company issue shares theirinitial round of shares,
subsequently company issues,additional round of shares.
Therefore, if you own a certainamount of shares, you now own a
(03:13):
smaller percentage of thecompany.
Is that a working definition?
squadcaster-a956_1_05-29-2025 (03:17):
I mean in, that exact way of
stating it.
That's right.
Yeah.
If you have the same number ofshares and the company issues
more shares to other people,then you own less of the company
by virtue of havingproportionally less.
Piece of the pie.
That's the way to think about it
emily-sander_1_05-29-2025 (03:35):
Okay.
squadcaster-a956_1_05-29-20 (03:36):
you know, if, if you, if you have a
bigger slice of the pie, um, andmore pie is somehow created and
given away than you have lessthan you had before.
Yeah.
And that's generally not a goodthing.
I mean, you know, I'd saycategorically speaking, dilution
isn't good generally.
ed-barton---it-_1_05-29-2 (03:57):
Yeah, there's a, the argument is
always made that it's like,well, you gotta smaller piece of
a bigger
squadcaster-a956_1_05- (04:02):
Exactly.
Yeah.
ed-barton---it-_1_05-29-20 (04:03):
that bigger pie might, and that
smaller piece might not be as,might not be the right
squadcaster-a956_1_05-29 (04:10):
Right.
ed-barton---it-_1_05-29-2 (04:10):
split for you.
You might be hungry.
squadcaster-a956_1_05-29- (04:13):
Yeah.
ed-barton---it-_1_05-29-20 (04:13):
With that split.
squadcaster-a956_1_05-29- (04:14):
Yeah.
emily-sander_1_05-29-2025_15 (04:15):
So we alluded to this in our last
podcast episode.
We were talking about the captable and debt and equity and
mezzanine and all that goodstuff.
And we were kind of goingthrough the se, the sequence of
this stuff, and you two wereboth mentioning it.
And at this point you getdiluted and at this point the
original investors would getdiluted.
And so we thought this would bea good topic, but where does
(04:36):
this come into play in real lifefor investors, for pe, for VC
funds?
We've kind of talked about awhole bunch of these things.
squadcaster-a956_1_05-29- (04:44):
well, I'll tell you where it doesn't
come into play, which is areally good place to be if you
can manage your way through itis to bootstrap your business so
that you're not giving away.
Pieces of your company to takeon outside capital.
Like so your business, forexample, Emily, you haven't
taken on other investors, so youown all of your business,
therefore, you're notexperiencing any dilution, you
(05:05):
know, and presumably never will,which is the way to be.
And there are a lot of examplesof that out there where big
companies that you hear abouttoday been around for a long
time, they've just never takenon outside capital because you
know, they've had.
You know, growth andprofitability out the gate and
they'd never had to do it.
And I think really that comesdown to the choice to take on
(05:28):
external capital, take on otherbusiness partners, um, raise
more money, you know, equityspecifically.
Um.
That's where you have to decidewhether, you know it's worth it
to be diluted or give up of whatyou've built and, you know, give
that away forever basically.
Unless you buy it back someday.
But, you know,
emily-sander_1_05-29-2025 (05:48):
When, when would you have to make that
decision?
squadcaster-a956_1_05-29- (05:51):
well, a lot of companies look at it
when they're close to runningoutta capital.
Um, that's, that's usually aplace where you pretty much are,
your hand is kind of forced.
say, darn it, you know, I'd loveto bootstrap this thing, but I
can't.
And so I need to go ahead andtake on an investor, and I know
I'm gonna have to give up apound of flesh for that
ed-barton---it-_1_05-29-2 (06:10):
Yeah,
squadcaster-a956_1_05-29-20 (06:11):
Um,
ed-barton---it-_1_05-29-202 (06:12):
the
squadcaster-a956_1_05-29- (06:13):
yeah,
ed-barton---it-_1_05-29-2025 (06:13):
to get money is when you need it.
squadcaster-a956_1_05-2 (06:15):
exactly right.
That is exactly right.
ed-barton---it-_1_05-29-2 (06:18):
worst time to get money is when you
need it,
squadcaster-a956_1_05-29- (06:20):
Yeah.
ed-barton---it-_1_05-29-202 (06:20):
you lose your negotiating leverage.
squadcaster-a956_1_05-29-2 (06:22):
Yep.
ed-barton---it-_1_05-2 (06:23):
dilution in some cases.
I, I mean, I agree with Rory in,in a general sense in that if
you can bootstrap your businessto the point where you can sell
it and do that without takingexternal money, more power to
you, and that's, that's gonna beyour best choice.
Um.
achieve, if that's your strategyand that's what the goal you
(06:44):
want to achieve.
Most businesses that, you know,if you look at a Facebook or you
look at, you know, Mo, even mostof your public businesses, they
haven't been bootstrapped.
They've had folks
squadcaster-a956_1_05-29 (06:51):
Right.
ed-barton---it-_1_05-29-202 (06:52):
and each round that folks come in,
the, the leverage changesdepending on how successful the
business
squadcaster-a956_1_05-2 (07:02):
Mm-hmm.
ed-barton---it-_1_05-29-2 (07:02):
take, you could go, if you have a
really successful business, youcan go out and raise capital
squadcaster-a956_1_05-29- (07:07):
Yeah.
ed-barton---it-_1_05-29-202 (07:07):
and actually it's gonna cost the
investor a lot.
And so the dilution is gonna beless.
Really, the, the goal is alwaysgo out for capital when you
don't need
squadcaster-a956_1_05-2 (07:16):
Mm-hmm.
ed-barton---it-_1_05-29- (07:17):
always have an overperforming business
so that you can have a beautycontest and a competitive
environment for your capitalround.
And if you're not, if you're inout there like hat in hand
begging for, you know, beggingfor your capital, that's when
you're gonna get the, that'swhen the dilution is
squadcaster-a956_1_05- (07:34):
Exactly.
ed-barton---it-_1_05-29-20 (07:34):
that cheap, that cheap cocktail.
You talked about really bad.
I.
emily-sander_1_05-29-2025_ (07:38):
What did you mean?
What did you mean?
When the investor has to pay,pay, pay for it.
squadcaster-a956_1_05-29- (07:44):
Well, it just means if you have, uh,
we'll use a real example here,Amazon, um.
You know, Jeff Bezos is largelythought of as pretty savvy,
savvy business person becausewhenever he had taken on money,
new money, external capital,like what Ed's saying it was
when there was a lot of demandto be part of that growth
(08:04):
journey.
So when an investor is trying toget into like a hot stock or
something like that, you end uppaying a premium for that.
And same thing goes in privatebusinesses you're issuing
private classes of shares, whichis to say.
If you have a lot of demandlined up, you can dictate the
terms to the investors for whichthey come in.
So you might give up a verysmall slice of your company to
(08:28):
take on a lot of money.
emily-sander_1_05-29-2025 (08:30):
Okay.
squadcaster-a956_1_05-29-2 (08:30):
flip side, the the opposite of that,
what we're talking about, wherebad if you need the capital and
the investor knows you need thecapital and that they're the
critical path to that, you mighthave to give up a lot of your
company.
to get the kind of capital youneed to keep growing the
business.
Um, and not only beyond thefinancial aspects of owning less
(08:53):
of your company, of coursethere's also control aspects.
You know, you want to, I mean,as a founder, you know,
management team, what have you,uh, you know, maintaining as
much of a control position aspossible.
And that's generally based on.
The proportion of the companythat you own, you get to be more
of the decision maker.
You get to be more control ofthe board seats, things like
(09:16):
that.
Mark Zuckerberg's anotherexample of somebody that's
managed to do that very wellover time, and that's a function
of what we just talked aboutwas, you know, that's a company
that everybody wanted to be partof and so you know, they get a
pick and choose.
they bring in and dictate theterms to the investors, and
probably most of those investorsare pretty happy right now if
(09:37):
they came in early on thatbusiness, no matter what the
terms were that they had to signup for.
emily-sander_1_05-29-2025_15 (09:41):
If a founder can, can a founder do
anything at the beginning toprevent their shares from being
diluted?
squadcaster-a956_1_05-29- (09:47):
Yeah.
ed-barton---it-_1_05-29-202 (09:48):
Um, yeah, and I think one of the
things Rory talked about with,with Zuckerberg was they had
multiple classes of
squadcaster-a956_1_05-29- (09:55):
There you go.
Yep.
ed-barton---it-_1_05-29-2025 (09:57):
so the, there's founder shares
squadcaster-a956_1_05-29-2 (09:59):
Yep.
ed-barton---it-_1_05-29-20 (09:59):
like a.
One share gets 40 votes,
squadcaster-a956_1_05-29 (10:02):
Right.
ed-barton---it-_1_05-29-202 (10:03):
and then there's the investor shares
where one share gets one vote.
squadcaster-a956_1_05-29- (10:07):
Yeah.
ed-barton---it-_1_05-29-202 (10:07):
And so even though the founders may
have diluted themselves to 30%of the ownership, they still
have a majority or a supermajority of the voting interests
so that they can control theboard of directors, they can
control the, they, they maintainthat control that Rory was
talking about.
Now you're gonna trade.
When you do that, you're gonnatrade.
(10:28):
Um, generally for value.
So it's, there's gonna be a costassociated with setting some of
those things up.
But the key thing that a personcan do or that a founder can do
to actually prevent themselvesfrom being diluted is to have an
overperforming business and havea strong competitive fundraising
round where you've got multipleplayers.
'cause those multiple playerswill go, I want to
squadcaster-a956_1_05-29- (10:50):
Yeah.
ed-barton---it-_1_05-29-202 (10:51):
and I'm gonna value your business at
a hundred million.
And then the next one goes, I'mat one 10, or I'm at one 20, or
I'm at one 30.
And you get super majorityvoting interest.
And so you, you drive that andthat's where your investment
banker also is gonna be able tokind of bring their forces to
bear if they're worth theirsalt, to make sure you get that
maximized.
squadcaster-a956_1_05-29-20 (11:10):
And the reason why this sort of
delineation of slicing the pieinto play so much with earlier
stage businesses, um, ratherthan, let's say a private equity
company coming in is, is reallygenerally speaking when a
private equity company mostlycomes into the picture.
I shouldn't say mostly.
In, in, in a lot of cases,they're buying the entire
company.
So it's like the, you're, you'rejust basically saying, okay, I
(11:32):
want the max value for mybusiness and I'm gonna have a
competitive process to get thatmax valuation.
In a case like this, oftentimesearlier stage businesses are
selling off minority pieces oftheir business, but they want to
maintain as much of the pie asthey can for how much they're
selling, uh, how much moneythey're raising.
They want to give up as littleas possible.
(11:52):
In the case of the privateequity game, it's more like I, I
already know I wanna sell ahundred percent of my company.
I just want to get the max valuefor that.
emily-sander_1_05-29-2025 (12:00):
Okay, so what about when a private
equity company sells to anotherPE company?
Did does the first PE company'sshares get diluted?
ed-barton---it-_1_05-29-202 (12:13):
No, and you don't tend to see that.
It tends to be a full sale, likeRory said.
But where you do see that is onthe venture
squadcaster-a956_1_05- (12:19):
Exactly.
Yeah.
ed-barton---it-_1_05-29-20 (12:20):
have venture round a
squadcaster-a956_1_05-29-20 (12:21):
Mm.
ed-barton---it-_1_05-29-2 (12:22):
might have a smaller venture capital
firm that's backed it, and thenyou gotta go, oh crap, we're
not, oh crap.
It's a good problem.
We're growing so rapidly.
we need to go out and raiseadditional rounds, and instead
of going to a small venturefund, we're gonna go to Madrona,
or we're gonna go to KleinerPerkins, or we're gonna go, you
know, one of the big boys.
squadcaster-a956_1_05-29- (12:40):
Yeah.
ed-barton---it-_1_05-29-2 (12:41):
those big boys are gonna come in and
they're gonna dilute.
folks in Round A,'cause you'regetting additional money comes
in so the pie gets bigger.
guys go, well, I'm gonna, I'mgonna write a check for a
billion dollars.
But that billion dollars isn'tgoing out to the other
shareholders.
In normal cases, it's going intothe business.
(13:01):
And so the businesses has a pre.
squadcaster-a956_1_05-2 (13:04):
Mm-hmm.
Mm-hmm.
Yep.
ed-barton---it-_1_05-29-202 (13:06):
And then it has a post money value,
which is the value of the biggerpie, plus the opportunity cost
plus the the growth opportunitythat's built into that
additional money.
And that's where yournegotiation is, is what's,
what's my pre-money value, mypost money value?
And how much of that post moneyvalue does do the original
shareholders or do theshareholders before that round
(13:29):
because they're gonna getdiluted with that in that post
money scenario.
squadcaster-a956_1_05-29-2 (13:33):
Yep.
emily-sander_1_05-29-2025_ (13:35):
Yes.
Okay.
So it might happen more commonlyin the VC rounds, but we did
mention last time that one ofthe exit strategies is to sell
to a PE firm, and that's in ourbook.
So in those situation, is itlike they're just buying the
whole thing again, so it doesn'treally matter?
squadcaster-a956_1_05- (13:48):
exactly.
ed-barton---it-_1_05-29-20 (13:49):
the, the original P firm.
Unless they do a sidecar orsomething along those lines,
which again, is, is more like aVC where the original fund is
going.
We still want to, we still wantto come in, but we want
additional equity.
They may not be in a positionwhere that fund has additional
equity to contribute.
I.
You know, so that that privateequity fund is kind of tapped
(14:10):
out or they're not making newinvestments, they're returning
capital to shareholders.
They want to, or to, to limitedpartners.
They want to be able to make anadditional, or that business
needs additional capital.
They may have a second privateequity firm come in at that
point, you're, you and it'sprimary capital going into the
business as opposed to buyingout
squadcaster-a956_1_05-2 (14:28):
Mm-hmm.
ed-barton---it-_1_05-29- (14:29):
buying off.
At that point you may have, um,some dilution, but that's a,
that's a not a extraordinarilycommon transaction.
emily-sander_1_05-29-2025 (14:37):
Okay.
Are there like some, there'sgotta be some absolute horror
stories out there of people whojust got washed out and they
didn't like, didn't do anythingwrong per se.
They just didn't know how itworked or they just.
ed-barton---it-_1_05-29-20 (14:48):
I'll give you
squadcaster-a956_1_05-29- (14:49):
Yeah, absolutely.
ed-barton---it-_1_05-29- (14:50):
here's the worst horror story.
You have folks that get dilutedfrom control to non-control,
they've got 49% of the businessand they control nothing and
they can't get their money out.
So, so they end up going, oh,well I'm going to, so I'm a
founder, I've built a reallynice business.
It might be doing, you know,seven, 7 million, 8 million of
(15:11):
ebitda.
gonna come in and I know I needsome additional equity, so I'm
gonna come in and you raise a$50million of primary equity to
come into the business, inreturn, you're giving up 51% or
60% of the business to do that.
then six months into it.
(15:32):
The VC goes, you're not theright executive for us.
We want somebody different.
You're going to, you know,you're out.
Nothing you could do except yourentire net worth is stuck in
that
squadcaster-a956_1_05-29-2 (15:44):
Tied up in that business.
ed-barton---it-_1_05-29- (15:45):
likely stuck with a board seat that
doesn't have any control, makesyou a fiduciary of the business.
So you can't compete, you can't,I mean, you're, you, you could
end up like in a real, that'sthe horror
squadcaster-a956_1_05-29- (15:56):
Yeah.
ed-barton---it-_1_05-29 (15:57):
There's a horror story where like, my
business is distressed.
And I dilute, it gets, and I getdiluted down to zero
squadcaster-a956_1_05-29 (16:03):
Right.
ed-barton---it-_1_05-29 (16:03):
because of caps stack.
You know, they, they throw on apreferred or they throw on, you
emily-sander_1_05-29-2025_ (16:07):
Down to zero though.
ed-barton---it-_1_05-29-2025 (16:09):
to zero, effectively, economically
down to zero.
But the, that's almost betterthan to be stuck at like 49% and
not have any control and haveall your money tied up and you
can't compete and you're stuckkind of sitting on the
sidelines.
That, that to me is like.
That's, that's horrible.
squadcaster-a956_1_05-29- (16:31):
Yeah.
ed-barton---it-_1_05-29-202 (16:32):
And I've seen that.
I've also seen folks diluteddown to zero because the, know,
they basically were in distressand they,
squadcaster-a956_1_05-29- (16:40):
Yeah.
ed-barton---it-_1_05-29-2 (16:40):
said, yeah, we need additional
private, or we need additionalcapital.
And they said, look, putadditional capital and it's
gonna be, you know, preferred.
So that's good.
squadcaster-a956_1_05-29- (16:48):
Yeah.
ed-barton---it-_1_05-29-202 (16:49):
you may, you can have your comment
all you want.
You know, it kind of comes backto the capital stack discussions
we talk about in, in, uh.
In our, in our book or on a fewof these other podcasts where
they may have, from a commonstock perspective, they may not
experience dilution at all.
They may hold all the commonstock still, economically
squadcaster-a956_1_05-29-20 (17:08):
but may never see of day.
Yeah.
emily-sander_1_05-29-2025_15 (17:11):
So there's kind of like, there's
different levels to think aboutthis on.
It's not just the financial,although that's important to a
lot of people.
There's, you mentioned like thevoting rights.
So the control, like you haveinfluence, you have a say, you
can make decisions versus like,I may be the founder of the
company, but now I'm like abound pigeon.
I can't do anything because I.
squadcaster-a956_1_05-29-202 (17:28):
It says your baby, that you're now
basically and watching somebodyelse raise that, baby into a
child or, or, you know.
Taking it.
I, I mean, a lot of times what Isee with founders is when that
happens and they give upcontrol, it's like the business
goes a completely differentdirection or something like
(17:49):
that.
And that, that is the hardestthing for them to deal with
because they conceived of it.
They, you know, got it to acertain point and now they can
really do nothing more about itbecause of the way they've been
structured out of the business.
emily-sander_1_05-29-2025 (18:01):
Yeah.
squadcaster-a956_1_05-29- (18:01):
alas, there are ways in which you can
avoid being diluted.
Sometimes it's costly.
Of course, you know, you can.
Have preemptive rights tocontribute more capital and
later around so that you cankeep a proportional share.
Now, easy for somebody to say,but if you're not a, you know,
billionaire or something likethat already, and you know,
you're at, you're raisinganother large funding around,
that's hard to kind of keep upwith.
(18:23):
So I, you know, that's, there'slevels of practicality to
emily-sander_1_05-29-2025_1 (18:26):
But how would that work?
Just in theory?
squadcaster-a956_1_05-29- (18:28):
Well, let's say, you know, you, you
have a, I don't know, 50%position in your business today.
And you go, you need to raiseanother$50 million.
That would mean that you wouldneed to put up the next 25 to
keep that position basically to,to maintain 50% ownership.
So that's real simple math, butbut you can imagine with big
(18:49):
numbers, that means you actuallyhave to come up with a lot of
capital yourself.
ed-barton---it-_1_05-29-2 (18:54):
Yeah,
emily-sander_1_05-29-2025_1 (18:54):
Is, is there any clause or any
preemptive thing you can dowhere I get to retain my
percentage and then I get, I, Ican, I have to buy it, but at
like a cheaper price, like Iwon't have.
ed-barton---it-_1_0 (19:07):
negotiable.
squadcaster-a956_1_ (19:09):
negotiable.
Yeah, it's all been done.
ed-barton---it-_1_05-29-202 (19:11):
are premised on your leverage and
your leverage
squadcaster-a956_1_05 (19:15):
Leverage.
ed-barton---it-_1_05-29-20 (19:15):
upon the, the condition of the
business and how much you needthe capital and how much
competition
emily-sander_1_05-29-2025_150 (19:19):
S
ed-barton---it-_1_05-29-2025 (19:20):
to
emily-sander_1_05-29-2025_15 (19:20):
So in the scenario where you're
doing well and like investorswant to be a part of it, and
you're like, okay, you, you canpay for it.
You could set up like, okay, I'mgonna let you in, but also just
know that I'm gonna retain myvoting rights.
I'm gonna retain my sharedposition, and I'm gonna give
myself the option to keep thatshare position at like a lower
(19:41):
cost per share if it gets tothat.
ed-barton---it-_1_05-29-2 (19:43):
you'd better be performing like, you
know, fricking Mikhail Nik off,you know, on, because you ain't
gonna be getting that kind ofdeal on, on a typical, even an
atypical, uh, that's, that wouldbe exceptional.
That would be like.
Well once a once a decade typeof type of deal You just talked
emily-sander_1_05-29-2025 (20:04):
Okay.
Ed Ed's saying funny names, butdo we have like some success
stories of like how to dodilution well, or like, Hey,
this is like if you do dilution,this is how you wanna do it.
squadcaster-a956_1_05-29-20 (20:15):
Um, yeah, I mean, I think there's.
sorts of success stories.
I, I guess the couple that, youknow, we've talked about a
little bit earlier, you know,Amazon and Facebook, and that
comes down to those businesseshaving all the leverage.
And so their founder ownersbasically maintain control and
insane amounts of wealth throughthe, through the process of
(20:37):
taking all their money.
Uh, the other thing I think it'sworth talking about is this
isn't just applied to folks thatare founders or, you know,
emily-sander_1_05-29-2025_ (20:45):
Hmm.
squadcaster-a956_1_05-2 (20:46):
initial investments.
From a capital standpoint also,you know, there's generally,
with a lot of these earlierstage businesses, there's
employee pools of stock.
So one of the things that ifyou're working for one of these
and you get grants and stuff upfront, you know, you'd have to
be thinking down the road of tosay, okay, how many other
funding rounds were there gonnabe in this thing before the
exit?
(21:06):
Which is what everybody's kindof building for.
you have to be careful and youmaybe try to ensure that you,
you know, the employee poolitself doesn't get diluted,
right?
Let's say an employee poolrepresents 15% of the stock at a
certain point of time.
For you as an employee that'sgot a vested interest in this,
this stuff, literally, literallyvesting interest.
(21:28):
You wanna make sure that thatemployee pool stays at that 15%
or greater if you, again, if youhave leverage.
Maybe it becomes 20, who knows?
But you, what you don't want tosee is it become down to five.
So, you know, your Max grant isgonna be, you know, presumably
less and less, and you're gonnabe working more and more and
harder and harder the, thefurther this thing goes.
So that's something to really ofif you, if you base your future
(21:52):
outcome on stock-basedcompensation.
emily-sander_1_05-29-202 (21:55):
That's a really good point.
'cause then your employees couldjust get totally just
discouraged and like, all right,well my, you know, my retirement
plan.
squadcaster-a956_1_05 (22:04):
employees are what makes companies happen
and makes, makes things go for abusiness.
So I, you know, I don't, I, it'sfairly rare where I feel like
the, you know, even, you know,changing of the guard bringing
in investors, they don't want tosee the employees, just like you
say, totally pissed, you know?
So there's usually a, a balanceto strike there, but it is just
(22:24):
something to be mindful of
ed-barton---it-_1_05-29-2 (22:26):
Yeah,
squadcaster-a956_1_05-29- (22:26):
your, your own pot of things
shrinking.
ed-barton---it-_1_05-29-2025_ (22:28):
a lot of times what I've seen is
you have the.
The option pool
squadcaster-a956_1_05-29- (22:32):
Yeah,
ed-barton---it-_1_05-29-20 (22:33):
stay at 10%.
squadcaster-a956_1_05-29- (22:34):
yeah,
ed-barton---it-_1_05-29 (22:34):
before, but it's, and it's 10% now.
So you have new options.
squadcaster-a956_1_05-29- (22:37):
yeah.
ed-barton---it-_1_05-29 (22:38):
options are issued, but they're issued
at the new valuation so that,that
squadcaster-a956_1_05-29 (22:41):
That's right.
Yep.
That's right.
ed-barton---it-_1_05-29-202 (22:43):
you know, kind of the ups from that
point forward.
So the, the original options arediluted, but they're at a lower,
but they're at a lower, they'reat a lower valuation.
So they've got, they've stilllocked in that value.
squadcaster-a956_1_05-29- (22:56):
Yeah.
ed-barton---it-_1_05-29- (22:56):
Locked in the value.
squadcaster-a956_1_05-29- (22:58):
Yeah.
ed-barton---it-_1_05-29-202 (22:58):
see it until you leave.
Um, and the exit happens, butthey get, the pool stays at 10%,
but all the new options are atthe new higher valuation.
So you've gotta earn, you've
squadcaster-a956_1_05-29- (23:08):
Yeah, it's all about timing.
I'm like just chuckling tomyself here, being reminded
that, you know, a company Iworked for at one point in time,
I joined the company was reallystoked.
'cause I got, you know, I gotoptions in it and stuff.
But then I later learned that mystrike price on my options went
up like almost four to four x.
What it was like the monthbefore the company got revalued
(23:29):
from a much lower valuation.
had I started earlier, I'd getat the exit, which did happen.
I would've gotten like fourtimes my
emily-sander_1_05-29-2025_1 (23:37):
no.
squadcaster-a956_1_05-29-20 (23:38):
But hey, say Lavie, that's how it
goes.
You know,
emily-sander_1_05-29-202 (23:41):
Timing is everything.
squadcaster-a956_1_05-29-2 (23:42):
days I'll end up on the right side of
those deals.
emily-sander_1_05-29-202 (23:45):
Timing is everything in lots of areas
of life.
Yes.
squadcaster-a956_1_05-29-20 (23:49):
is.
Yep.
emily-sander_1_05-29-2025_ (23:49):
Just outta curiosity, is there any
way that, uh, share would getwhat is the opposite of diluted,
concentrated?
Where to actually be worth more?
squadcaster-a956_1_05-29-20 (23:59):
Mm,
ed-barton---it-_1_05-29-2025_ (24:00):
i I haven't seen a lot of that.
You do have situations where youcan have share buybacks.
I mean, you see that more withpublic companies where if
squadcaster-a956_1_05-29-20 (24:07):
for sure.
ed-barton---it-_1_05-29- (24:07):
excess cash and they go, okay, we're
gonna buy back some equity.
Um, you can see that sometimes,I suppose in like a private
equity setting where you retirepreferred.
So it may be convertiblepreferred that gets retired, and
then with cash and then yourcommon stock now that you don't
have those.
Conversion rights hanging outthere ends up more concentrated,
(24:30):
but it's rare because again, thewho's gonna be the seller, the
time where you might, you know,at the, at the concentration
point.
So where, where you would tendto see it is more the people
leave.
I mean, this is one that I haveseen over and over again.
So kind of on the flip side ofthat is you have a 10% employee
pool that's all been issued,that means the other folks have
(24:53):
a 90% interest.
And then all those employeesquick get fired, whatever, and
squadcaster-a956_1_05-29- (24:57):
Yeah.
ed-barton---it-_1_05-29-2025 (24:58):
of the employee pool.
They don't reissue the other 6%.
So that means that, that,
squadcaster-a956_1_05-29- (25:02):
Yeah.
ed-barton---it-_1_05-29-20 (25:03):
that essentially concentrated, um,
the balance, but it's normallynot a, you know, that, that's
around the margins.
And that's, and that's fairlytypical that you've got an
employee pool that's not fully,fully out, invested.
squadcaster-a956_1_05-29-20 (25:16):
The point here is that it's also
fungible and like over timethese things, you know, move
around a lot.
So you just need to know whatlevers to watch out for and to,
to think about.
Um, so that you, you understandwhat's at stake at every point
in time when you're getting anew round of funding or
something like that.
Structure means everything here,you know?
(25:38):
Um, and I think like the balanceof strike, right?
If you're a founder perhaps, andyou're thinking about whether to
take on capital or not, andlet's say in a scenario, you,
you, you could somehow maintainyour control.
You just really need to thinkabout, okay, the whole point of
taking on more capital is toexpand the size of the pie.
Well.
You know, if I expand the pieand even if my slice of the pie
(26:00):
gets smaller, will I be betteroff in this scenario or not?
You know, assuming you know you,you like the partner and all
this other stuff, you just haveto think economically and say,
okay, know, does, does taking onmore money lead to a overall
better outcome?
Even if I have less of a shareof the company?
And I think, you know, whenpeople take on those rounds of
(26:20):
funding, that's what they cometo the conclusion on.
It's like, yes, that is betterfor me.
That is better for the company.
ed-barton---it-_1_05-29-202 (26:25):
the additional funding, the
additional cash reduces the riskpremium.
squadcaster-a956_1_05-29- (26:28):
There we go.
There we go.
we go.
Risk premium.
ed-barton---it-_1_05-29-2025_ (26:32):
I
squadcaster-a956_1_05-29- (26:33):
Yeah.
ed-barton---it-_1_05-29-202 (26:33):
RIS premium in.
I've been, I've been waiting.
squadcaster-a956_1_05-29- (26:36):
Gonna turn this into a drinking game.
ed-barton---it-_1_05-29-20 (26:37):
our, our subscribers are gonna have
the risk premium drinking gameevery time that says risk
premium,
squadcaster-a956_1_05-29-202 (26:42):
So true.
Yeah.
Yeah.
emily-sander_1_05-29-2025_15 (26:44):
as you go through the rounds of
funding, who is the one makingthe decision of whether or not
to dilute the shares or not?
Is it like the majority party,
squadcaster-a956_1_05-29-20 (26:52):
The board of directors.
emily-sander_1_05-29-2025_1 (26:53):
but it's like the majority?
ed-barton---it-_1_ (26:56):
effectively, but
squadcaster-a956_1_05-29- (26:57):
Yeah.
Yeah.
ed-barton---it-_1_05-29- (26:58):
again, you could have a situation where
the majority, the majority use aFacebook example, the majority.
It could not be, could not havea majority of the board, because
they don't have a majority ofthe votes.
They've got a majority of the
squadcaster-a956_1_05-2 (27:11):
Mm-hmm.
ed-barton---it-_1_05-29-202 (27:12):
And so it's, it's a,
squadcaster-a956_1_05-29- (27:13):
Yeah.
ed-barton---it-_1_05-29-202 (27:14):
the board of directors makes that
decision.
again, the board of directors istasked with fiduciary
responsibility to, to make, youknow, the company perform as, as
best it can and the act in thebest interest of the company,
which includes the shareholders.
squadcaster-a956_1_05-29-2 (27:26):
Yep.
ed-barton---it-_1_05-29-202 (27:27):
So,
squadcaster-a956_1_05-29-2 (27:27):
And, and typically founder and or CEO
is, you know, not only on theboard, but typically the chair
person of the board too.
So, you know, you, you haverepresentation at that level
from the operating business aswell as other investors and
outside advisors.
emily-sander_1_05-29-2025_1 (27:43):
But that's where, in the example we
gave earlier, where foundermaybe gave up the financial.
Shares, but kept the majority ofthe voting rights, then that
founder could decide, we'reactually not gonna dilute this
further because I'm gonna voteagainst that.
ed-barton---it-_1_05-29-2025 (27:59):
Or
emily-sander_1_05-29-2025_1 (28:00):
And
ed-barton---it-_1_05-29-2 (28:00):
gonna get certain terms,
squadcaster-a956_1_05-29- (28:01):
Yeah,
emily-sander_1_05-29-2025 (28:02):
yeah.
Okay.
ed-barton---it-_1_05-29-20 (28:03):
the,
emily-sander_1_05-29-2025 (28:04):
there any other like levels to think
about, there's like financial,voting rights, are there other,
other kind of levers to pull.
squadcaster-a956_1_05-29- (28:10):
Well, before we do that, I think this
is, I just wanted to connectthis back to a really important
thing.
If you're a founder, it's worthnot getting screwed by working
with an advisor to help youthink through these things.
Because again, you oftentimes,you're dealing with investors
that all they do every day iscap tables to their advantage.
(28:33):
I, you know, I think some of thehorror stories we could drum up
have to do with founders beingnaive or being told something.
when, you know, you look at thefine print, it's not what it
seems.
So, like, as we've talked aboutin our book, and, you know,
strongly advise here is, youknow, get a circle of trust
around you, whether it's legaladvisors or financial advisors,
et cetera, that can help younavigate the complexities of
captive.
(28:53):
I'm A CFO for crying out loudand these things are complex and
sometimes make my mind, youknow, bend.
So, it's worth the time.
It's worth the money.
It's worth the of mind knowingthat you got somebody else
looking at it with you.
It has your interest at heart'cause you're paying them
likely, you know?
So,
emily-sander_1_05-29-2025_ (29:11):
Yes.
Alright.
Exit question time.
squadcaster-a956_1_05-29-2 (29:15):
Ooh, okay.
emily-sander_1_05-29-2025 (29:16):
Let's do a couple, couple rounds.
Lightning round here.
Finish this sentence.
You know, you're about to getdiluted when,
squadcaster-a956_1_05-29-20 (29:25):
You are running outta capital and
you're needing to go ask formore.
ed-barton---it-_1_05-29 (29:29):
There's an LOI on the table.
squadcaster-a956_1_05-29 (29:31):
You're right.
It's that simple.
Yeah.
Yeah, yeah,
emily-sander_1_05-29-2025_1 (29:35):
if.
squadcaster-a956_1_05-29- (29:36):
yeah.
Especially if you haven'talready negotiated it, but yes.
Yeah.
emily-sander_1_05-29-2025_15 (29:39):
If equity dilution were a dating
relationship, what stage wouldit be in the honeymoon, the
breakup, or the complicatedmiddle?
ed-barton---it-_1_05-29-202 (29:47):
If, if, if equity dilution was, oh,
it's a complicated middle.
squadcaster-a956_1_05-29-202 (29:52):
It is complicated.
ed-barton---it-_1_05-29 (29:53):
middle.
squadcaster-a956_1_05-29- (29:54):
Yeah.
ed-barton---it-_1_05-29-20 (29:54):
the, it's like the.
We don't want to talk to eachother part of the
squadcaster-a956_1_05-29- (29:58):
Yeah.
ed-barton---it-_1_05-29-202 (29:58):
but I'm stuck in it.
squadcaster-a956_1_0 (30:00):
Mediation.
Pretty much.
Yeah.
emily-sander_1_05-29-2025 (30:01):
Gosh.
All right, last one here.
Dilution in three words go,
squadcaster-a956_1_05-29- (30:12):
Three words.
ed-barton---it-_1_05-2 (30:12):
managed.
squadcaster-a956_1_05-29- (30:14):
Yeah.
Avoid if possible.
emily-sander_1_05-29-2025_1 (30:21):
but could be good.
squadcaster-a956_1_05- (30:22):
forever.
emily-sander_1_05-29-2025 (30:23):
Could be good.
squadcaster-a956_1_05-29-20 (30:24):
two words actually.
emily-sander_1_05-29-2025_1 (30:27):
CFO can't count.
squadcaster-a956_1_05 (30:28):
Bootstrap forever.
Damnit.
emily-sander_1_05-29-2025_1 (30:31):
You can hyphenate, bootstrap, and
stretch it out if you needed to.
Alright.
squadcaster-a956_1_05-29-20 (30:35):
I'm all, I'm very familiar with, you
know.
Capital markets and, you know,different types of the cap
table.
But at the end of the day, I amjust gonna say, just, just fund
it all yourself if you can.
Don't worry about the otherstuff.
Maybe take on some debt and makethat efficient for yourself.
But, you know,
emily-sander_1_05-29 (30:51):
Beautiful.
squadcaster-a956_1_05-29-2 (30:52):
fund it yourself.
emily-sander_1_05-29-2025_1 (30:54):
and now we know more about dilution.
squadcaster-a956_1_05-29-202 (30:56):
We do.
Yeah.
emily-sander_1_05-29-202 (30:57):
Thanks Ed.
Thanks Rory.
Catch you next time.
squadcaster-a956_1_05-29- (30:59):
Yeah, talk soon.
ed-barton---it-_1_05-29-2 (31:01):
Thank you.
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