Kak
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Was it because of dilution? I've heard it's a common trick that not only hurts crowdfunding investors but angel investors as well.
As far as MJ's situation is concerned, that sucks, and I have no idea what voodoo accounting methods they used to screw him. That's crap, pure and simple and probably the individual company, not the platform itself. There's no excuse for offering up zero financial information and being shady like they were.
Used correctly, dilution isn't really a trick, it's just something that takes some surgical diplomacy. It can certainly be used to shit on people, but there is a BIG reason for it and you should never sign away your leadership rights to proportional dilution.
Let's say you sell 40% of the stock in your startup for 500k, you still own 60%. Your assumptions were right, the investor will receive the entirety of their expected return, but you discover something additional to do as a company. A pivot that will make the company 10x more lucrative, but you need money to do it.
It profits 1m a year now, whatever.
With the new business function, it will profit 10m.
You need the money, it's deal on with the money, and deal off without it.
Let's say you need 3 million dollars this time, if you want to chase this... The best deal you have found is 50% for 3 million.
At this point, your original investor should be acting in WITH YOU, for the best move forward for the company. BECAUSE IT ISN'T ONLY YOUR COMPANY, it belongs to BOTH you and your investor.
Just for the sake of the argument:
Your stock currently represents ~$600K/year
Theirs currently represents ~ $400K/year
The first investor's investment would be fine, but not amazing, without the second raise. With the new money, even if you proportionally diluted, the original investor would be MUCH better off and so would you.
With the injection and dilution:
your stock would eventually represent ~$3m per year
the original investor at ~$2m per year
new investor at ~$5m per year.
Better across the board.
Now, let's say you give them the entire 50% out of your stock.
Your 10% remaining share of the company represents only ~$1m/y of the company. Only 400k more of the company per year and you have to build it to $6m per year just to break even on this stock sale.
It is bullshit to ask only the CEO to shoulder that second raise. After all, it isn't just the CEO's company at the time they needed more money. They TOGETHER are acting in the best interest of the company.
The deal really is, once stock is owned, proportional hits are always the best. Everyone just needs to understand and agree on what is best for the company.
Choosing 40% of 1m is stupid if you can have 20% of 10m.
An expectation for the entrepreneur to have to shoulder that raise is ridiculous and would likely erode their loyalty to that business in favor of a second company.
As someone that has always had respect for his investors, I have always mentioned this in the very beginning. Dilutions are possible, but only to make ALL OF OUR INVESTMENTS, both my time and your money more lucrative. A move forward for the company. This isn't about screwing anyone and I like my stock as much as you like yours, that's why it will be a tough decision to dilute because it will hit me every bit as much as you. So, if it happens, there will be a good reason.
This also works on the flipside, the company runs out of money, needs more to pull out of a slump, the proprietor and the investor should shoulder the dilution burden together to keep the company going or else their investment could become worthless.