You raised too much cash.
How can that be, and/or why is that bad? Well, investors were willing to value your sleep-improving hardware and software company at $22 million, pre-money. They were all set to give you $6 million, for a post-money valuation of $28 million. The $6 million would last you 2 years, at which time you thought you would then raise $15 million, and that would be enough to get you to profitability (or at least close). The dilution on this first raise then would be such that you had sold 6/28ths of your company to outside investors.
But no. You got nervous. You listened to your Nervous Nellie parents who had no faith in the world. So instead of rolling the dice, you raised $22 million, selling half your company and raising massive amounts of capital. With employee stock option and other dilution along the way, you ended up owning 10% of your company when it sold for $180 million. After tax, your $18 million was about $10 million. It was just enough to buy a 3-bedroom ranch house in Palo Alto. You're not rich by Silicon Valley standards, but you did just fine. Had you not listened to your parents, not overcapitalized yourself early, only raised the minimum cash needed, you'd have had closer to 30, maybe 35 percent of your company when it sold for $55 million, to net $35 million, at which point you could have retired.
That's what you get for letting your parents get under your skin. Now enjoy working the next 20 years.
Related or Semi-related Video
Finance: What is Dilution?77 Views
finance a la shmoop. what is dilution? ownership is a pie.
here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]
can't see them. each is a share of ownership in the company whatever.com
well one day the CEO of whatever.com decided she wanted to buy her hated
competitor something.com for 2 million shares. then she wanted to buy her
marketing vendor sell my butt off.com for a million shares. well her stock had
been trading at 12 bucks a share for a total market valuation of 240 million
dollars .see we get that 12 times 20 million. but then after printing 3 [equation]
million more shares to buy her competitors,
well she now has 23 million slices of pie .and yes that's how it works!
companies can essentially just go to the Xerox machine and print shares of their
own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]
outstanding and not 20 million. so at $12 a share the stock market is valuing her
company at a meaningfully higher price. 12 times 23 million is 276 million. it's
saying that the value of the three million share dilutions she took in
buying something dot-com and Sell my butt off.com [woman waves to camera]
was the difference between the 276 million in the 240 million or 36 million
bucks. but let's say the market value had stayed flat at 240 million. well now with
23 million shares out the stock is only worth 10 dollars and 43 cents a share,
instead of the previous $12 a share. in other words shares have been diluted
each share of whatever com is no longer worth as much as it used to be. that pie
isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]
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