Hello Frank,

This is RC, UCI graduate student. We have meet informally on a few occasions such as OCTANe events as well as my attendance as a "guest" in the past to TCA-OC bi-monthly company pitch/screening events.

An entrepreneur friend has inquired me two good question about "VC funding" and to which I do not have a good answer for the person. And I think you are a very knowledgeable person in this realm who can provide input and perhaps additional online resources/report that I can delve in further.

So, here are the two questions and my initial thoughts on them.

Q1: What is the best practice for a Series-A funding dilution for a start-up company, given the capital raised is between $5MM to $10MM? What % of the company valuation is usually forfeited?

A1:
[RC]: I did some online Googling, and it seems the best practice is 50% of the company value. And at first thought, it would seem ideal to select VCs that "value" the company the most to have minimal dilution, but it seems picking the "right" VCs to help the company might actually be more important here than money or anything else. So, for example, say we pick a top VC firm (e.g. sequoia, kleiner perkins), how much would these VCs invest in series-A and at roughly what range of company %? Consider no prior investing (e.g. private investors), how much would the entrepreneurs lose?

[Frank]: For Series A I hear 50%. A Series B VC this last week was saying he saw funding as 40-40-20, 40% for founders and Series A investors, 20% option pool then 40% new money in the B round. In a Series A angels usually fund less total dollars and get less of a percent, e.g. $2M pre-money, $1M raise.

Q2: Can entrepreneurs (company founders) put in an anti-dilution provision in a Series-A term sheet? And if this a good protection metric, in general, would it be better to have a full-ratchet or weighted average ratchet agreement?

[RC]: I read online that "anti-dilution" is sometimes used by the angel investors in the pre Series-A found. But if the company was entirely bootstrapped prior, can the company founders use the same "anti-dilution" to protect themselves for the future of the company value?

[Frank]: Remember, new money gets to set it's own terms, so write whatever you want, but it will perhaps only complicate a later transaction and maybe scare off a VC who sees it as a complication he just doesn't need to deal with. I suppose the first point to make is, these kinds of terms only come into play if the company is less than totally successful. Clever wordsmithing isn't going to protect you from situations that may arise in the future, the market will rule.