The importance of capital structure in a Series A, dilution and number of shareholders

Dilution is a key factor for future investors when raising a Series A.

Indeed, funds may fear that founders who are too diluted will see their motivation diminish in relation to capital gains targets, or even that they will leave the project prematurely if the company runs into difficulties.

In a Series A round, they therefore look for companies in which the founding management team have retained a significant share of the capital, or at the very least have not lost their majority stake.

– The ideal (but very rare!) situation: no dilution.

– The situation that is generally prohibitive: the managers have already lost the majority with little money having entered the company.

The number of shareholders is also a go/no go criterion for funds. A simple capitalization table with a small number of shareholders should be a priority objective.

Precautions to avoid excessive dilution :

Of course, use non-dilutive financing without moderation (BPI, honor loans, subsidies, EIC…),

Use SAFEs in business angels rounds, rather than firm valuations which are often too low, but sometimes too high!

Prefer club deals with a single shareholder in the capital (subscribers grouped together in a holding company) to individual investments which will overload the capitalization table.

If the damage is done: too much dilution and/or too many shareholders, try to buy out certain shareholders and/or group some of them together in a holding company (it’s not always easy to convince individual shareholders to join forces in the same structure!)

That’s it, there is the ideal scenario and then there’s the reality on the ground, which is more complicated to manage, but keep these objectives in mind !