Capital raised has less to do with founder dilution

It may seem counter-intuitive, but if a business requires a lot of equity to grow, it doesn’t necessarily mean founders will dilute away their ownership. We recently did an analysis looking at founder ownership relative to equity raised for 38 publicly traded tech companies. The data surprised us as there is no discernable relationship between founder ownership and capital raised. We thought the more equity raised, the lower founder ownership would be, but that didn’t turn out to be the case. The data is presented visually below.

In order to make the chart more readable, we removed outliers of Alibaba, Facebook, Snap, Spotify, and Sabre. Even when we remove these companies which raised a lot more equity than peers, we still see a strong clustering to the left of the chart (companies in the chart raised on average $217mm) but the equity ownership is all over the place (average for the chart is 27%). The raw data is below and includes the outliers that the chart excluded (hence averages are different than the above).

Taking the analysis a step further, we looked at the correlation between capital raised and founder equity, which came out to be only -0.15. Recall that if the correlation was -1, it would mean definitively that the more equity raised, the lower founder ownership would be. Alternatively a correlation of 0 would mean there is no relationship at all between capital raised and founder equity. At -0.15, the relationship is weak at best, and nearly non-existent.

So how can there be no relationship between founder equity and capital raised? Does this mean you should raise as much money as possible? No. Looking at the data in a solo is somewhat misleading: if you raise money, you’re getting diluted. That’s a fact. But, valuation matters so if you can raise at very high valuations, your equity is much more likely to be preserved whereas if you’re getting low valuations, large capital raises will eat materially into founder equity.

The data leads us to conclude that valuation is more important than capital raised when determining the impact of capital raises on founder ownership.