equity, funding, stock, seedLet’s say an Investor X invests 100K at a post-money valuation of 1M (10%) Unlikely but in the unfortunate event where after 1 year, the company doesn’t grow much and is again in need of money negotiates a deal where Investor Y agrees to invest 100K yet again at post-money of 1M.
What is the dilution of the stock held by investor X? How much % in stock would investors X and Y hold respectively after the second round?
What is the dilution of the stock held by investor X?
This is called a “down round.” The company is accepting new investment at a lower valuation than the previous round.
Assuming all parties agree, the new investor Y now owns 10% at a $1MM valuation. That means that the previous investor owns 10% of the remaining shares. Since the remaining shares are 90% of the current valuation of $1MM (90% x $1MM = $900k), the previous investor X owns 10% of $900k = $90k.
Considering that most startups fail, it’s not a bad deal for an investor that is not prepared to invest more for a startup that needs it. And generally the alternative is that Investor X has their investment disappear - if the new investor does not participate, the company sounds like it will likely fail.
Result: after Investor Y provides $100k for 10%, here is the result:
Investor Y -> 10% = $100k
Investor X -> 9% = $90k
Corporate Treasury/Others -> 81% = $810k
EDIT:
If you are looking to have Investor X and Investor Y have equal ownership, then Investor Y should buy 10% of the existing shares. Since Investor X purchased 10%, Investor X and Investor Y will have equal ownership.
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