On the rare occasion a really strong team of 3 or 4 come together to found a company, dilution becomes a big issue. In SaaS, founder dilution is a thing. Aaron Levie of box owned 4% at one point (re-upped to 6%). My thoughts & VC ground rules on how to handle this 👇:
Founders should aim to collectively own at least 20% of the co excluding ESOPs. Ideally 25%. This is after any and all fundraise rounds. Individual ownership shouldn't fall below 10%.
If an external CEO needs to be hired after a series B/C which happens in case of Enterprise cos at scale, the CEO's ownership is the benchmark a founder ownership simply can't fall below. Usually 5-8%.
Execution is paramount in these large founding teams - with a complete team of 3-4 there's simply no excuse for slow execution. If you don't execute fast, you won't be able to raise the next round at a low dilution. For example:
You raised 2m seed at 10 post w/ a strong team of 4. Before the round everyone owned 25%. You diluted 20% overall, so 5% each. Ignore ESOPs for now. Each founder owns 20% post-seed.
Series A can be raised at say another 20% dilution. If you are raising a 10m round, you need to be valued at 40m pre. Using pvt market SaaS multiples, you need to be at 2.5-3.5m ARR range in 18mos post seed (usually). A tall ask.
If you only hit $1-1.5m, & you are a 2 founder team, you can still, in a pinch, dilute 33% to raise 10m @ 20pre. But w/ a 4-founder team, each founder now owns only 13.3% after this round. Add 15% ESOP & each is left w/ 10% at an A! With at least 3 more dilutive rounds coming.
Lesson? Large founding teams need to execute like *mad*. Focus and double down on your strengths. Get to revenue ASAP. Your dilution targets should be 20%, 20%, 10%, <10%. Maybe skip a round (e.g. after a 2m, raise a straight 30m) by using revenue to buy more execution runway.
