YADM - Yet Another Dilution Model
May 19, 2020
Any programmer or Linux gear head should recognize the “Yet Another …” family of tools and frameworks. Stephen C. Johnson is credited with creating the first Yet Another tool when he created YACC – Yet Another Compiler-Compiler. Some currently popular Yet Another tools or frameworks include:
- YAML: Yet Another Markup Language (later rebranded as YAML Ain’t Markup Language) – a data serialization language usually used to capture configuration parameters
- YANG: Yet Another Next Generation – a data modeling language related to network configuration
- YARN: Yet Another Resource Negotiator – a component of the Apache Hadoop framework
Not to be outdone, I decided to create another Yet Another tool: YADM (Yet Another Dilution Model) – an Excel spreadsheet to help founders model the expected equity dilution as a startup reaches typical funding events.
Dilution is near and dear to the hearts founders everywhere. Many VCs, accelerators and incubators publish guidance on the typical dilution events a startup will encounter in its life cycle. Several web sites also provide downloadable spreadsheets that founders can use to visualize their expected dilution. Given this, why do we need yet another dilution model?
Well, simply put, the spreadsheets I’ve seen hard-code the financial terms of each funding event. Because every startup negotiates slightly different terms with their funding events, I wanted a tool that had some simple “knobs” that the user could turn to model their dilution given the terms of their specific investments.
Many startups have slightly different variations down the path of equity investments. Creating a custom model for each specific pathway is beyond the scope of this effort. To keep things simple, I built the spreadsheet with the following assumptions common to most startups:
- The earliest non-founder employees paid primarily with equity
- One round of angel or seed investment
- Three rounds of traditional VC investment
- The equity pool for the employees gets replenished based on the pre-money valuation — this just means that the dilution from the option pool is taken before the investment from the VCs.
I’ve provided a sample funding scenario in the screenshot of the spreadsheet (download here) below.
Let’s walk through how this spreadsheet captures various dilution events:
- Row 2: The user enters their specific data points of their dilution events in the orange cells in row 2. These orange cells are the “knobs” that the user should turn to model their own dilution scenario.
- Column B: When the startup is formed, the founders own 100% of the equity.
- Column C: The founders set aside 7.5% of the equity to distribute to the startup’s earliest employees. The founders now own 92.5% of the company.
- Column D: 10% of the company is sold to angel investors. The founders now own 83.3% of the company.
- Column E: The terms of the series A investment requires setting aside 10% of the equity for the employees that will be hired up to the next round of funding. Because most VCs negotiate this 10% to come from the pre-money valuation, the spreadsheet calculates the amount of equity required to reach the 10% pool post-money. The founders now own 72.8% of the company.
- Column F: The series A investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 58.3% of the company. Note: some might argue that column E is not needed since the series A investment is the primary outcome of the investment round. However, I break this out separately to help illustrate the multi-step dilution that happens as a result of the series A investment.
- Column G: As the series B investment comes together, the employee option pool needs to be replenished back to the 10% target. The same pre-money valuation terms apply. The founders now own 56.1% of the company.
- Column H: The series B investment closes, with the incoming VCs purchasing 25% of the company. The founders now own 42.1% of the company.
- Column I: As the series C investment draws near, the employee option pool again is replenished back to a target amount. This is essentially the same dilution math as columns E and G. The founders now own 40.9% of the company.
- Column J: The series C investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 32.7% of the company.
Hopefully, this spreadsheet helps you model your expected dilution scenario. Feel free to turn the “knobs” of the spreadsheet by changing some of the numbers in the orange cells of row 2.
My life is complete now that I too have published a “Yet Another” tool …