👋🏾 Hi friends!

The end of November is always a bittersweet for me. It is the period when I am excited by the advent of a new year, whilst also being really conscious of what I have achieved - or failed to achieve - over the course of the last year.

It’s also the time of year that there are waaaaaaay too many events on, so many so that I inevitably have to turn a bunch of them down even if I would love to attend.

On a separate note, I recorded a live show with Eghosa Omoigui and Jonathan Sun last week. We dived into what we thought the real story behind the OpenAI craziness was and what we thought was in store for the venture ecosystem over the next 12 - 24 months (spoiler alert, it’s not great news).

It was super fun to have done and I’m planning on doing a lot more of them in the future 🔥 

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

⚔️ Non Dilution Shares and why they’re a No No
👨‍💻 The CFO Tech Stack - my take on what’s in the market and what’s to come

Also, in this week’s Nothing Ventured, I spoke to Fatou Diagne and Stephanie Heller, founders of Bootstrap Europe. We talk about how they built their relationship taking road trips in the dessert and how they ultimately came to found Bootstrap Europe and, as underdogs, manage to buy out SVB’s Western European venture debt portfolio.

As always, our Primer episode gives you a bit of background on how they got to where they are today 💪 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online - I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect 💪🏾)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing - you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

Times are a changing people. The startup and venture market look like they’re going to go through a fair amount of turmoil over the course of the next few months (and beyond) and what this may well mean is the return to founder unfriendly terms.

I got my first glimpse of this when a founder I had been speaking to pinged me to ask a question.

He had managed to secure a decent (close to 7 figure) investment from an angel (so not an institutional investor) but, almost as an afterthought, the angel had asked if the founder would, on top of the investment, consider non-dilution shares.

It was a good job the founder reached out to me, because it would have been a very bad idea for him to have considered offering this type of shareholding to the angel - and here’s why.

Non-Dilution Shares are a class of shares that don’t get diluted in any future funding round.

Let’s slow down and think this through for a second. Let’s say you as a founder own 100 shares and offer 20 non dilution shares to an investor. This means on the face of it, you own 83.3% of the business whilst the new investor owns 16.7%.

No problems so far.

But let’s say you then raise an additional round and issue a further 30 shares to the incoming investor. In a “normal” funding event, this would mean that you now own 66.7%, the original investor owns 13.3% and the new investor would own 20%. That feels ok right?

But because of the non-dilution provision, the new investor would essentially end up buying shares for the existing investor so that they can maintain their shareholding (i.e. they would invest the same amount but get less equity for that same investment).

So what the shareholding would end up looking like would be 100 shares owned by you, 25 shares to the original investor and a further 25 to the new investor meaning you own 66.7% but each investor now owns 16.7% but critically the new investor has invested the same amount as they would have to have achieved their 20% share under normal circumstances.

Now imagine you want to create an employee option pool… 🤯 

This really has a couple of main effects:

1. You (and any other investor without non-dilution shares) take all the dilution.

2. Incoming investors are essentially paying for the existing shareholder’s shareholding which would be a huge red flag for most investors.

In effect, it penalises future investors making raising new capital harder for the startup.

If I were to be a little considerate to that initial investor, I would say that their request for non-dilution shares might be ‘fair’ compensation for the risk they are taking at the very early stages, but as it has the net effect of making subsequent fundraising much more difficult, it would be pretty shortsided for an investor to demand this type of share structure (unless they are going to commit to fund the business on an ongoing basis).

The other (arguably more common) form of protection that investors might ask for is anti-dilution.

This is much more common when taking on VC investment, and essentially structures shareholding such that in the event that a future round is at a lower valuation than the valuation at which they originally invested, their shareholding will be maintained.

This would seem like a more palatable situation as most businesses would anticipate an increase in valuation on each subsequent round, however, especially in the current market where many ventures raised capital at inflated valuations over the last several years, it’s much more likely that some will have to go through the pain of a down round as they seek out capital to keep the lights on.

The good news (for what it is worth), is that if the investment is substantial enough and critical for the survival of the business, investors can be negotiated with to waive their non-dilution / anti-dilution rights taking the view that a smaller percentage of something is better than a larger percentage of nothing.

What all of this means is that as founders in this environment, you are likely to come up against all kinds of unfriendly terms in term sheets as the balance of power shifts back towards investors (having been pretty founder friendly for the last several years) and you need to be prepared for it.

The same advice I gave the founder is what I’d give here:

1. Take the time to familiarise yourself with investment terms - obviously by reading this newsletter but also by reading books like Venture Deals by Brad Feld and Jason Mendelson (this book is the gold standard for understanding the various types of terms around economics and control in venture fundraising).

2. If you’re not sure, don’t bluff. Tell the investor you’ll come back to them once you have understood the implications more fully.

3. Talk to a CFO or a lawyer - do not fall into the trap of false economy. A bit of money (or none for that matter if you’ve got someone friendly like me in your network 😄) today, may save you a huge amount of time, energy and money in the future 💪 .