1. If an entrepreneur decides to raise equity, he or she must decide what stake they are comfortable with selling in the business. A lot of entrepreneurs question whether they should sell any equity stake at all. The reason why equity sale (also called ‘dilution’) works is that the entrepreneur may land up generating larger wealth by owning a smaller stake in a larger company rather than by owning 100% in a smaller company. Larger companies have higher chances of surviving and monetizing equity stake through a company sale.

2. However, entrepreneurs must remember that when an equity investor invests in a company, the investor asks usually for significant rights including approving the strategy of the company, asking for a committed path to exit, non-compete provisions, etc. The larger the stake that an investor gets in a company the more rights that investor gets.

3. In some industries that have ‘winner take all’ characteristics, and this is particularly the case in consumer internet industries, it is essential to raise capital to try and take significant market share as soon as possible. In these industries, the entrepreneur has little choice but to raise lot of equity capital and get diluted very soon thereby being left with minority stake. In some industries, raising so much capital is not as essential. In such industries, an entrepreneur can choose to not get diluted but grow gradually and slowly.

 

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