Upskill lecture: Investment and share dilution- Sajid Amit

 

Investments are an essential part of any startup's growth plan, but they frequently carry the danger of share dilution. Companies may need to issue new shares of stock as they look to generate money to support their activities; this could result in a reduction in the proportion of the business that the existing shareholders currently own.

The dilution of current stockholders may suffer a great deal as a result of share dilution, even though it may be an essential step in a startup's development. Share dilution happens when a business distributes more stock, which can lower the worth of current shares and alter the company's general ownership structure.

Impact of investment and share dilution on startups and their shareholders

To finance their development and accomplish their company goals, startups frequently need large sums of capital, cost management for startup is very important in this regard. The majority of the time, these businesses will use equity financing, which entails giving buyers shares of stock in return for money, to acquire the required funds. This can be a good method for startups to get the money they need to expand, but it can also result in share dilution, which can have a big influence on the business and its stockholders.

The amount of the dilution and the conditions of the equity funding deal, among other variables, can have a significant influence on how startups are affected by share dilution. The control of the business is distributed among a greater number of stockholders, but generally speaking, share dilution can cause a decline in the worth of current shares. Due to the possibility that more shares will be distributed in the future, early-stage investors and creators may see a decline in their ownership stake in the business.

Share dilution can have an effect not only on shareholding but also on the company's capacity to draw in new investors. It might be more challenging to secure advantageous conditions for future stock funding cycles as the ownership structure becomes more complicated. A significant dilution may also indicate to prospective investors that the business cannot produce enough cash flow to finance its operations and development plans without issuing additional shares.

In spite of these possible limitations, equity funding and share dilution can be a useful method for startups to get the money they need to expand and meet their company goals. Startups and their stockholders should carefully consider the conditions of any equity funding deal and work with knowledgeable legal and financial experts to ensure that their interests are safeguarded in order to reduce the risks associated with share dilution. Startups can use equity funding in this way to accelerate their development while reducing the possible drawbacks of share dilution.

Sajid Amit’s view about share dilution

Sajid Amit discussed angel investment which is in the value chain of further runs of investing and ultimately startups. High net worth people or organizations making their own investments in startup or early-stage businesses in return for equity control are referred to as angel investors.

A lot of startups are equity based in terms of the sort of investment they can get. So according to Sajid Amit, ultimately we have to discuss venture capitalism because when your company gets bigger, you can attract larger funds. The value chain of getting equity investment here the most important thing you need to remember for startups is that even if you are able to attract angel investment, you will always have to balance between fast growth as when you get investment it basically means your startup is growing.

Sajid Amit used an example to explain that properly. Suppose you have an app and the app is named xyz. By this app you are giving service to buyers. The thing that can happen to this app, for instance, if you have the urge to grow and you already have the app already developed and you have good credential and you are kind of renowned in the market, you have a good professional track record and also you have a good team, you have some personal or founders bank saving through which you can cover the cost, in that case if you can bring investment, often it is seen that bringing investment causes share dilution.

In the next round, like in the next 2 to 3 years you can bring investment anyway. But it can be witnessed that, your fund’s equity was 70% once because you had some founders  and when simultaneous share dilution happened, it became 15-20% which is not a great place to be in. because as a founder of course you want control and you have a  strategic vision of your startup and once you start losing equity, in one period of your life you won't be able to give direction to your company. So Sajid Amit says that while it is important to understand how you raise angel investments, you also have to understand the pros and cons of it.

How you can minimize share dilution

Every choice you make when funding can actually affect how much ownership you'll ultimately have when you sell your business. While many of the issues we discussed cannot be prevented, there are some ways to reduce share dilution.

Don't collect more money than you actually require to advance your company.  The first money you borrow for your business is the most diluted. Early investors receive stock when your company is worth less, so each dollar or taka they put up gets a proportionately bigger share in your business. Make sure to plan ahead and set financial goals that will help you advance your company to the next level.

Avoid building a larger choice group than necessary. Investors might request that you set aside more money than you actually need, but if you develop a hiring strategy, you can always explain how you determined the size of your optimal pool, which could be useful in talks.

Conclusion

It is crucial for investors to carefully weigh the possible benefits and dangers of making investments in businesses that are inclined to issue new shares.

Similar to this, startups must strike a compromise between their desire to maintain control and value for their current shareholders and their need for money. In the end, gaining a fundamental grasp of share dilution is essential for making wise financial choices and achieving long-term success in the constantly changing world of finance.

This article is originally published on Kagoz.