The raising of new equity in unlisted Companies fulfils the need for additional cash inflow to build and grow the business, but it does of course dilute the stakeholding position of then current Company Investors and, in particular, the Founders/Promoters.
Hopefully the new equity issued is at a higher price to the then most recent raisings i.e. at an increasing Company valuation resulting in a net positive uplift as it increases the value of all stakeholders now-smaller “piece of the corporate pie”.
So, what are the dilution effect on Founders as the Company progresses through each round of new capital raisings?
The potential upside of dilution is that the capital the Company receives from selling additional shares can improve the Company’s performance, profitability and ultimately the value of its stock.
PrimaryMarkets recently came across some results from USA-based J. Thelander Consulting’s survey (www.jthelander.com/news-and-events/news/) which included responses from 380 USA private venture-backed companies.
Our view is that new funding requirements and valuation multiples are not all the same as they differ across industry sectors and businesses alike. Doing a “like for like” comparison is usually most difficult in the unlisted Company space. We attach below the results of 3 sector surveys produced by J. Thelander Consulting – Biotech, Medical Devices and Tech – remembering the survey is from for USA-based Companies:
Graph 1: Biotech Founder Ownership by Funding Amount
Graph 2: Medical Device Founder Ownership by Funding Amount
Graph 3: Tech Founder Ownership by Funding Amount
Naturally, all Founders get their respective ownership diluted as and when they raise new equity but it is interesting to see the survey results as to see by how much. An important factor one needs to always consider is whether the Founder remains in an controlling or operating role within the Company.
In the best of worlds one would hope that the Founder’s stakeholder value and the Company’s value increases so it should be a “win-win” situation but, in the worst case, the economics can turn against Founders fairly quickly. Most justification of value can firmly centre to change in post-transaction earnings per share. Thus, it is important for Founders to completely understand their stakeholder percentages and position as their Company seeks new equity as it will matter in the long run.
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