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What are the anti-dilution measures available to a project leader during a fundraiser?

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This technical note is intended to enlighten any project developer who wishes to raise funds while protecting themselves against dilution. By dilution, we mean the dilution of the shares and the control of the company. After reading this note, the project leader can get an overview of the different sources of funding he can use to start his project. What funding should be favored to reduce dilution? Starting from its own funds and promoting debt financing, the entrepreneur will realize that he reduces to dilution to zero. On the other hand, debt financing is not always possible or appropriate, so he will have to turn to sources of capital funding, where he will be diluted.

In this note, we will discuss each source of financing by summarizing the advantages and disadvantages before guiding the project leader towards recommendations to be put in place to favor reduced dilution.

To support our recommendations, the following section will be devoted to questions and answers to provide additional information. The questions will notably handle ‘the shareholders’ pact to put in place to reduce the dilutive impact, both on the level of the shares and the control of the company. We will also answer the question that any entrepreneur fears “In the context of debt or capital financing, what happens in case of bankruptcy of my start-up?” or we will see that the consequences are not the same depending on the choice of funding. Finally, we will end the questions and answers by clarifying which profiles to choose in the context of a fundraising with capital entry but also on whether an idea is sufficient to raise funds.

The last part of this note will explain the case of Go4Padel, a start-up incubated at VentureLab, which used a fundraiser to finance itself. The peculiarity of this start-up is that its founders first brought their own funds before going to meet the 3F “Family, fools and friends” to supplement their need for financing. We will also see what strategy has been put in place to reduce the dilutive impact and regain control over the shares over a four-year horizon.

At the end of the report, you can find sources to consult for more information on the various topics.

Written by:

Thibaut Mercier student at HEC Entrepreneurs 2017-2018