If you’ve ever made a deal with someone and you weren’t sure that they were going to follow through with their end of the arrangement, then you know why escrow providers exist. 

Historically, this is how most financial transactions were made — a buyer or investor would wire funds to the seller or issuer without complete confidence that they would hold up their side of the bargain and that their representations during due diligence were truthful and accurate. 

As a result, any participant in a private market transaction would be subject to meaningful 

Today, this risk is limited by using an escrow provider during a transaction. An escrow provider is a type of company that acts as a neutral third party in private market transactions to hold certain funds related to the transaction until both sides meet their contractual obligations in the deal. 

In addition to mitigating counterparty risk, escrow providers introduce many transaction-related benefits to stakeholders, such as custodying funds before dedicated bank accounts are set up or if a transaction is delayed for ongoing negotiations or simply for procedural reasons. 

Years ago, financial transactions were handled offline, in person — with the buyer and seller meeting to close the deal and transfer funds. However, as transactions became digitized and buyers and sellers started transacting from different parts of the world, the need for escrow services surged.

As a response to the developments in private market transactions, regulatory bodies followed suit and created rules governing who can provide regulated escrow services, as well as what processes and controls such service providers need to have in place, bringing compliance and transparency to the ecosystem. 

Private market participants benefit from using an escrow provider, particularly given the inherent fragmentation and opacity in private market transactions. 

Escrow providers can help bring transparency, confidence, and standardization to each deal, allowing parties to focus on the merits of the deal itself, rather than either side keeping their word. Depending on the type of transaction and which financial partners are involved, it may be required to use an escrow agent.  

Private companies and investment leads (such as venture capital funds, private equity funds and family offices) use escrow providers when raising capital from investors. In either case, the escrow provider is typically hired by the issuer—i.e., the party raising capital—and custodies the investor’s commitments until the issuer's obligations are met, at which point the escrow provider can transfer the investor’s funds to the issuer. 

Escrow agreements in private capital raises are a set of documents that stipulate which conditions must be met in order for the escrow funds to be transferred to the receiving party. Most commonly, an escrow agreement will define the minimum amount of capital that the issuer must raise before investor funds are transferred to them. This contingency can also be accompanied by the escrow agent’s responsibilities, the timeframe for the issuer to raise investor capital, and due diligence contingencies. These stipulations instill confidence in investors — particularly those who write smaller checks or ones who commit funds early in a fundraising process — as they know their investment will be returned if the issuer can’t raise the amount they need to execute on their plans. 

On the issuer’s side, and especially in the case of newly established entities or those creating holding companies for the purpose of the transaction, this may also be beneficial as a means to gather the funds until they are able to open a bank account. A process which often takes some time to complete.

In M&A transactions, an escrow provider is used to ensure that both sides of the transaction are truthful in their representations and are acting in good faith throughout the process. Three common use cases for escrow providers in M&A transactions include:

Ultimately, an escrow provider serves both sides of a transaction to facilitate a clean and transparent deal, while providing downside risk to each party and ensuring that all stakeholders are acting in good faith. Some key benefits of using an escrow provider include:

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time, reduce administrative costs, and bring transparency to your transaction process. 

Using an escrow provider in your private market transaction can improve transparency between each side and reduce counterparty risk. Find out what exactly an escrow provider does and key use cases for having one.

Benefits of using an escrow provider

Entrepreneurs and their early teams face many challenges while starting and growing their businesses. One of the most significant challenges is testing your initial hypothesis, shipping an early version of your product, and measuring customer feedback.

Before scaling, you need to understand if there is demand for your product. Do people want what you’re building at the price you’re selling it at? 

Startups refer to this as “product-market fit.” And today, we’ll break down what you need to know about finding and measuring product-market fit, and what achieving product-market fit could mean for your business. 

There is no single definition of product-market fit. Marc Andreessen, the co-founder of Andreessen Horowitz who is credited for initially drawing attention to this matter, said in his 

, “Product-market fit means being in a good market with a product that can satisfy that market.”

In practice, product-market fit means there is a real market demand for your product and people are willing to purchase your product at the price it is offered. This is a sign that customers derive greater value from using it than the price of it, or that it’s a better solution than alternatives on the market. 

Product-market fit makes customer acquisition easier because existing customers tell their friends about your company, and new customers sign up. This is fundamentally the most crucial aspect of building a company. 

Why is product-market fit (PMF) important for your business?

Finding product-market fit is critical for your business before you decide to invest more resources into building products that people may not want.

Once you understand that there is a market demand for your product, your teams across sales, marketing, product, and customer support can all move in the same direction, supporting customers and building experiences that people want. 

On the contrary, failure to find product-market fit can lead to your company running out of money and shutting down. CB Insights found that this was the reason approximately 35% of startups fail in their 

How do you find and measure product-market fit (PMF)?

Finding product-market fit can be a journey through many rounds of customer feedback and product testing.

The main goal is to collect the information necessary to deeply understand your target customer’s pain points and how to solve those pain points at the right price. 

When you’re first starting, it’s common to test your initial hypothesis with customer research, surveys, and feedback from stakeholders in the industry. This data gathering can allow you to begin building an MVP based on the feedback you’ve received. Once you have an MVP built, you can track how your customers respond to your product to understand what users actually do when given the choice to interact with your product. 

Sean Ellis, entrepreneur and startup advisor, says that a strong indicator of product-market fit is asking your customers “How would you feel if you could no longer use the product?” If the percentage of respondents who answer “very disappointed” is over 40%, that is a strong indicator of achieving product-market fit.

Qualitatively, your customers should be obsessively using your product. A strong sign of product-market fit is having customers who praise your new product and refer their friends to sign up. If your customers eagerly utilize your product because they understand exactly the problem that it’s solving, you know there is a real market demand that’s present.

Other ways to measure product-market fit include tracking usage metrics from your customers, including retention, engagement, and conversion rates for upsell opportunities. 

What can product-market fit (PMF) mean for a scaling business?

When customers need your product and are willing to pay a price for it, businesses tend to have a good problem. 

Although strong customer demand is necessary for a successful, growing company, it can also introduce scaling challenges due to creating resource constraints. 

When companies find product-market fit, they can experience hyper-growth, misalignment in key objectives, and a lack of organizational structure.

Entrepreneurs should embrace the opportunity to find product-market fit but be prepared for the growth challenges that can ensue.

Why mature companies seek product-market fit (PMF)

Although product-market fit is a core consideration for young businesses, mature companies also seek this. 

Over time, your customers’ preferences will change as new technologies arise and new competitors enter the market. 

It may be that customers no longer receive the same value out of your product as they once did. Or, you may be planning to introduce a new product to your existing offerings. Ensuring you consistently deliver value to your customers is necessary to remain a healthy and growing business. 

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process.

Product-market fit occurs when you satisfy a need in the market and customers are willing to pay for your solution. Learn more about how you can find product-market fit and what this can mean for private companies. 

What is product-market fit (PMF)? Here’s what you should know

 enters the global financial system every year from unknown sources. These funds often come from illegal organizations used to finance criminal activity, such as drug trafficking, terrorism, and financial crimes using the global financial infrastructure, or for purposes involving tax evasion.

This practice is known as “money laundering,” and has caused national and international organizations committed to protecting our financial infrastructure to fight back with measures known as “anti-money laundering” regulations, or “AML” for short. 

AML regulations require financial institutions to take measures to identify who they are doing business with. By verifying the identities of customers and business partners, financial institutions aim to reduce the risk of bad actors using their infrastructure to introduce illicit funds into the financial system. 

As the technology used for customer due diligence and onboarding has developed over the years, companies beyond the scope of traditional financial institutions have stepped in to enforce AML measures. From payment providers to technology platforms, or even founders raising capital, AML measures have become widely accepted as a best practice for getting to know the customers and partners you’re doing business with.

When implemented correctly, AML solutions help businesses stay compliant with regional and international regulations, build trusted relationships with their partners and customers, and help customers maintain confidence that their institutions are only servicing the legal and legitimate needs of their customers. 

AML regulations around the world have developed since the 1970s when the United States passed the Bank Secrecy Act (BSA). It was the first AML legislation enacted that created rules for recordkeeping, customer identification, and special reporting of large cash transactions. 

Following the passage of the BSA, AML legislation continued to grow internationally with the creation of the Financial Action Task Force on Money Laundering (FATF) amongst G7 countries, new initiatives in the European Union, and eventually regulations across the MENA region throughout the 2000s and 2010s. 

How companies stay compliant with AML regulations

Companies are required to design an AML program that effectively verifies the identity of their customers and prevents money laundering. Many regional regulatory bodies enforce best practices set by the FATF.

Key components of an effective AML program include assigning a dedicated compliance team, creating internal procedures, conducting employee training, and chief among them, performing customer due diligence, also known as Know Your Customer (KYC). 

KYC—a critical component of an effective AML program—is a process designed to collect information and verify the legitimacy of your customers and business partners.

By using a risk-based approach to customer due diligence, companies aim to monitor both who they are dealing with and the nature of transactions that are occurring.

Depending on the nature of your business—who your stakeholders are and how you allocate resources across your company—your internal KYC procedures will likely differ. At its essence, your KYC process should seek to understand your customers’ overall profile, source of wealth and funds.

For financial institutions, the following personal information is commonly collected in order to execute their KYC processes: 

Document verification is often required as well (either digital or through certifications from authorized third parties, such as lawyers)

When customer due diligence needs to be conducted on an entity, the process is similar to KYC, however, the type of information collected will be a little different. This process is known as Know Your Business (KYB). Information collected can include: 

3. Proof of address and ID for UBOs, Directors and Authorized Signatories

If the initial verification checks indicate that a potential customer or business partner may be suspicious, the internationally recognized standard of a risk-based approach supports companies in performing enhanced due diligence on the individual or business. There are also certain procedures related to notifying the relevant regulatory body of any suspicious activities detected.  

Measures that companies take to address high-risk individuals

When an individual or business is deemed to present a high risk of being a bad actor or participating in illicit financial activities, companies must conduct further risk assessments, known as enhanced due diligence.

While there is no single objective measure that makes a person high risk, companies can follow international best practices for performing enhanced due diligence. Some common red flags for potentially high-risk people include:

A company’s specific AML procedures will determine its strategy when conducting enhanced due diligence on a high-risk person. Ultimately, the company’s goal is to further investigate the identity of the prospect, corroborate personal information with additional documentation, confirm their funds are from legitimate sources, and ensure that the person is acting in good faith and not trying to conduct any illicit activities. 

Depending on the company, enhanced due diligence may look like:

Companies have their own guidelines when dealing with potentially high-risk customers and may determine a customer cannot be onboarded based on the outcome of their enhanced due diligence findings. 

The benefits of a fully digitized AML program

A robust AML program involves the collection of many documents and a thorough review of a prospective customer. 

Historically, manual KYC processes would take longer and present a security risk of keeping personal information confidential. 

Today, emerging technology service providers leverage a fully digitized approach to customer due diligence which has been shown to improve the customer experience, reduce the time it takes for most customers to be approved, and enhance the security of personal identification information through digital KYC modules, resulting in a seamless investor onboarding experience. 

AML programs around the world make our global financial infrastructure safer and more trustworthy for the billions of people who transact every day. 

Why does this matter in venture-backed companies?

As a venture-backed company, a meaningful part of your job is staying well-capitalized. To do this, you’ll have to raise capital from investors, often several times over the years. It’s critical that you understand who your stakeholders are before you enter into a decades-long relationship with them as you grow your business. Not only does this apply to the shareholders on your capitalization table, but also to your employees, suppliers, and business partners. 

Conducting due diligence on all stakeholders is a responsible measure to ensure long-term sustainability in your business relationships. 

As part of the MENA ecosystem, we are doing our part to ensure private market transactions occur among trusted and verified participants. We provide the tools to conduct and enhance KYC/KYB processes and keep your personal information confidential. 

We believe that over time, knowing your investors and business partners will become common practice in private market transactions. 

A company’s AML program is the foundation for understanding your business stakeholders. Leveraging a fully digitized AML program can lead to a better customer experience, a reduction in the time it takes for most customers to be approved, and greater security measures for all participants. 

What you should know about customer due diligence and onboarding 

The fundraising journey is full of key considerations that are often misunderstood by both first-time and experienced entrepreneurs. 

As you raise capital from investors, you’re typically negotiating with professional deal makers—investors who have had hundreds or thousands of repetitions. 

In this article, we’ll explain what you need to know during your fundraising journey so you can enter into your investor conversations with confidence. 

Common security types that entrepreneurs use to raise capital 

When you decide to raise capital from investors, one of the first questions you must answer is, “What exactly will investors be buying?”

There are several types of securities that entrepreneurs can use to raise capital. These securities generally fall into three categories:

Just like the name suggests, convertible securities are financial instruments that can be converted into equity at a future date. 

This type of security is favorable to entrepreneurs at the earliest stages of company formation because of the ease and relative cost-savings for issuing convertible securities. Convertible securities also allow entrepreneurs to delay the valuation component of raising capital, particularly when a company is too young for the market to appropriately value. 

Importantly, you should be careful to not raise too much capital using convertible securities early on as this can cause steep dilution in the future. As you raise capital using convertible securities, it’s important to maintain a clean 

 with future conversion scenarios to understand what your dilution could look like at the next qualified financing when the securities convert into equity.

There are two main types of convertible securities: convertible notes and SAFEs.

A convertible note is a convertible debt security—a financial instrument that is issued as debt with a maturity date and interest rate—but converts into equity upon the next qualified equity financing. 

Convertible notes are typically issued with a valuation cap—the maximum valuation that an investor’s note will convert into equity at—and a discount rate—a discount to the price per share at the next qualified financing. 

These two mechanisms benefit early note investors to accept the additional risk of investing at an earlier stage in a company.

Simple Agreement for Future Equity (SAFE)

SAFEs, like convertible notes, are convertible securities that convert to equity at the company’s next qualified financing round. These too are commonly issued with a valuation cap and a discount rate. 

However, SAFEs are not considered debt securities; therefore, SAFEs are typically not issued with a maturity date or interest rate. These securities do not ever have to be paid back to investors if there is no future qualified financing event. 

, each one determining the conversion math upon the next qualified financing. 

SAFEs have become the most common security type for early-stage companies and are friendly to both investors and entrepreneurs. 

When entrepreneurs raise capital by issuing equity to investors, investors receive shares in a company at an agreed-upon price. This is the most common way to raise capital in growth-stage and late-stage companies. 

Entrepreneurs issue two types of equity securities: preferred equity—or preferred stock—and common equity—or common stock. 

Preferred equity is typically given to investors in a company. This type of stock is considered to be less risky than common stock because it has seniority over common stock in the event of a company’s liquidation. Preferred stock is entitled to dividends before common stock receives any income. 

Preferred equity can also come with many additional benefits that make it a better deal for investors as we will discuss below. 

Common equity is usually held by company founders and is also granted to executives and employees. Common shareholders receive fewer benefits than preferred shareholders, including being paid after preferred shareholders in the event of a liquidation event. 

Entrepreneurs in the private markets raise debt capital for a variety of reasons, from inventory financing to working capital lines of credit. 

However, venture-backed entrepreneurs typically use debt capital sparingly and strategically. 

The most common form of debt financing for venture-backed startups is called “venture debt.”

Venture debt is a type of loan that is granted by lenders specifically for high-growth venture-backed companies. 

While multiple rounds of venture capital financing can 

 of entrepreneurs and investors, venture debt serves as a non-dilutive alternative for entrepreneurs to access capital without selling more shares of their company. 

Importantly, venture debt is typically only granted to companies that have raised venture capital financing, can clearly define their performance objectives over the next several months, and is usually capped at an amount benchmarked to a percentage of their last equity financing round. 

Choosing how to raise capital is an important decision. Whether an entrepreneur raises capital using convertibles, equity, or debt, it’s important to consider the key differences like the cost of capital, your company’s ability to service debt payments, and the dilution you’ll undertake by raising equity capital.

Key negotiation points for entrepreneurs and investors 

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

, famously said, “As you'll learn, there really are only two key things that matter in the actual term sheet negotiation—economics and control.”

While there may be several topics of negotiation, entrepreneurs and investors will spend most of their time negotiating the economics and control details of a fundraising round. 

Economic rights included in a term sheet will detail investor ownership, as well as who gets paid first, and who can participate in future fundraising rounds. Common economic provisions include:

Raising capital as an entrepreneur can feel like navigating a maze with no end in sight. In this article, we’ll explain what you need to know during your fundraising journey so you embark on it with confidence.

Raising capital: a guide for entrepreneurs  



The investment performance of venture capital and private equity funds is often irregular. In the early years, the fund will deploy capital and draw down management fees, and only years later will funds begin to realize mark-ups or distributions from portfolio company exits. 



This non-linear performance is referred to as the “J-curve” and can impact how investors think about allocating capital to private market funds. 



What is a “J-curve” in private markets


The “J curve” in private markets refers to the shape of investment performance—IRR, or the internal rate of return—in closed-end funds. Investment performance in private market funds is generally broken down into three sections: periods of capital calls, investment, and harvesting. These three periods define the J curve across both venture capital and private equity funds—albeit in slightly different forms—and have meaningful implications for the investor experience and investment return scenarios. 


During the initial years of a fund’s lifespan, the fund manager, or General Partner (GP), calls capital from their LPs and deploys the capital into deals. At the same time, the GP is also earning management fees, since LPs pay management fees based on the total amount of committed capital and not invested capital. From the LP’s perspective, cash outlays are negative in these early years. Investments in private companies can take years to bear fruit, meaning in the first few years of a fund’s life, capital is being deployed while usually no capital is being returned to investors yet.


In years 4-6 of the fund’s life, the fund’s underlying portfolio companies begin to grow in value resulting in unrealized gains for the fund and its LPs. Some portfolio companies may also be exited, leading to cash distributions. On the J curve, this time period is illustrated by a sharp increase in unrealized IRR by markup valuations. 


The last few years of a fund’s lifespan—typically years 7-10—are marked by the majority of the underlying portfolio companies being exited. In the harvesting period, the fund manager is seeking to maximize investor returns. As each investment is exited, the manager becomes closer to realizing the fund’s investments, making this part of the J curve flatten out from an IRR perspective.


General partners operate their funds in different ways that can impact an LP’s IRR over time—the shape of the J curve.



How secondaries can help investors mitigate the J curve effects


So what can investors do to avoid the early years of the J curve? 


Investors can participate in secondary transactions as a way of “buying in” to a fund’s performance further down the lifecycle. 


Secondary opportunities are attractive to investors because:



Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process.


The investment performance of private market funds is often irregular. This is called the J-curve—named after the shape of investment performance in private market funds. In this article, we break down what the J curve means for investors.

Understanding the J-curve in private markets

As an entrepreneur, you may decide to raise capital from investors to fuel your company’s growth. 

If you accept outside investment, you’ll have to agree upon a valuation for your company with investors. This determines a transaction price—at which investors are willing to purchase interests, and you, the entrepreneur, is willing to sell a part of your business. 

Raising outside capital is particularly common for startup companies that operate in high-growth industries often driven by technology.

In this article, we’ll explain how companies are valued by investors at different stages of their growth journeys. 

How investors differ across a company's lifespan 

At every stage in a company’s journey, there are unique challenges and opportunities a company faces in order to get to the next level. To accommodate a company’s unique position, investors commonly specialize in investing in specific fundraising stages. 

In general, private market investors specialize in early-stage, growth-stage, or late-stage investing. 

The stage of a company will determine the criteria investors look for when conducting due diligence on the investment opportunity. As a startup matures, an investor’s diligence criteria will help inform their financial underwriting models and ultimately, their target valuation for the investment. 

Below, we’ll describe how investors value companies at different points in their growth journey. 

Early-stage investors make investments in companies that are in the beginning stages of their lifespan. These companies often have little or no traction and are in the process of finding product-market fit. 

What early-stage investors look for when valuing companies

Early-stage investors care deeply about a company’s initial team members, as well as the market and any early traction the company has. 

: Since there is not a lot of data yet on the company’s performance, investors place a heavy emphasis on the early team. 

: Investors also want to see that a company is going after a large market or has the ability to “create” a market, meaning, providing a solution to a problem that people don’t know they have yet. 

: Investors love validation at the earliest stages. Something that says “This could be a big business.”

At the pre-seed or seed fundraising rounds, validation could be based on survey results, waitlist sign-ups, registrations, or other forms that indicate customer interest.

At the Series A stage, validation looks more like the beginning signs of traction, including early customers and revenue, signed letters of intent, or other promising interest from customers. Once traction begins to develop, investors will want to analyze customer and revenue growth rates, as well as churn, customer satisfaction, and other proof points that demonstrate people need your product. 

Growth-stage investors invest in companies that have already built their initial product, acquired their first set of users, and grew their initial team. Companies in this category often raise capital from investors to expand their product offerings, enter new markets, scale their teams, and attract new customers. 

What growth-stage investors look for when valuing companies

Growth-stage investors value companies based on their growth rate, traction, competitive landscape, and governance health.

 Customer growth and revenue growth are two key aspects investors care about in growth-stage startups. Depending on the industry, core metrics can include daily or monthly active users (DAUs or MAUs), annual or monthly recurring revenue (ARR / MRR), net retention revenue, and churn, among others.

 Investors will look into a company’s customer base, partnerships, and enterprise clients if applicable. Traction is very important at the growth stage and is a strong indicator of product-market fit. 

 Investors will want to assess the competitive landscape of a growth-stage startup. Some industries might be a winner-take-all industry, while some markets might have room for multiple successful companies. The ability to grow and increase market share is an important feature of a venture-backed company. Competition due diligence is done for this reason.

Notably, venture-backed startups have big ambitions, including global customers. Investors will analyze your competition in your direct market, as well as markets around the world. 

Is there a risk of an incumbent entering your market? Does your growth strategy include competing in markets with existing competition?

 The way that companies make important decisions becomes a critical component of due diligence for growth-stage investors. This includes how voting rights are distributed among key shareholders, including the executive team, and 

. Sometimes, investors will realize that a company has a 

 and key decision makers like the CEO have little voting power compared to early investors. Corporate governance can benefit or hurt a company as it continues to mature and seek and exit opportunity.

Late-stage investors vary by type and can include a broader group of investment firms given a company’s proximity to entering the public markets.

What late-stage investors look for when valuing companies

Late-stage investors value companies primarily on their financial health, earnings and product diversification, and future exit opportunities. 

 Investors value a late-stage private company on their financial health. Investors will take a careful look at revenues and expenses, growth expectations, and potential valuation multiples.

 As a company matures, investors increasingly want to see a company broadening its products and services. This can mean serving new customer segments, launching new products or services, or expanding into new markets. Investors value this for two primary reasons:

 After several rounds of venture capital funding, late-stage investors want to know if the company has a path toward liquidity via an exit event. Commonly, this will be an initial public offering (IPO), or a potential strategic acquisition, merger, or other similar avenue. 

Investors specialize in different fundraising stages to better support their target portfolio companies. How do investors value companies at different stages in their growth journey? In this article, we break down what investors look for when analyzing potential investment opportunities.

What investors look for when valuing startups at different stages

Let’s say, as an early-stage investor, you purchase 1,000,000 shares of Company A for $1 each in the company’s Series A fundraising round. After your investment, there are 10,000,000 shares outstanding, which makes your $1M investment worth 10% of the company’s $10M post-money valuation. 

Over time, Company A raises more capital from new investors in their Series B and Series C fundraising rounds. 

One day, an acquirer enters the picture and buys Company A for $100M.

You’re expecting 10% of the sale proceeds to hit your bank account for a $10M payday, but you come to realize that you're only entitled to $5M.

What happened between the time you made the investment and the acquisition?

Below, we’ll discuss everything you need to know about equity dilution.

Equity dilution— also known as “share dilution” or “fundraising dilution”— is when existing shareholders’ ownership percentage is reduced as a result of the company issuing new securities to investors. 

This occurrence is particularly common for startup companies and private market investors. 

When an entrepreneur starts a company, they typically own all outstanding shares. If they were to sell the company to someone else, they’d retain 100% of the net sale proceeds. 

However, during the fundraising process, startups issue securities in exchange for capital from investors. When the transaction is made, investors typically receive a fixed number of shares (equity) or a promise of future shares (SAFEs or convertible notes) for their investment. Importantly, this does not mean investors retain a fixed percentage ownership in the company. 

As a company raises additional capital from investors, each existing investor’s shares will represent a smaller percentage of the overall company. This is because the total number of outstanding shares increases, but existing shareholders own the same number of shares. 

Dilution starts from the first moment an entrepreneur raises outside capital either in the form of a SAFE, convertible note, or equity. This occurs whether or not the investor receives the shares at that moment or is given a promise to receive shares in the future. Even if the entrepreneur is giving investors a promise for future equity, the entrepreneur must consider future share conversions in order to forecast how much of the company investors will own in the future.  

Share dilution often impacts startup investors, especially considering high-growth companies need capital to fund their operations.  

Back to our example above, let’s say you’re the first venture capital investor in a company. You purchase 1,000,000 shares in the company’s Series A round for $1M on a $10M post-money valuation. Your 1,000,000 shares are worth 10% of the value of the company.  

Years later, the company needs more capital to grow, so it issues 5,000,000 more shares to new investors in its Series B fundraising round. 

And again, a few years later the company issued another 5,000,000 shares to investors in its Series C fundraising round. 

At this point, there are 20,000,000 total outstanding shares, and since you still own 1,000,000 shares, your ownership stake has been reduced from 10% to 5%.

As you can see, investors can be directly impacted by dilution, as more shares are issued, reducing your effective ownership in the company. If there was a liquidity event, you would be entitled to 5% of the proceeds, instead of the original 10% ownership you had.

Think shares of stock are the only thing that determines the amount of dilution investors can expect? Not so fast.

When investors purchase securities in a company, they want to know how many other shares or convertible securities are outstanding to understand how their investment may be diluted in the future. At the earliest stages of investment, for example, a pre-seed or seed round, investors will want to understand how many other outstanding convertible securities have been issued to investors, as well as shares set aside for the employee option pool. Additionally, investors will want to know if they are purchasing a pre-money SAFE or a post-money SAFE because the difference will determine how much dilution you experience when the SAFE converts to equity. 

Remember, when an investor purchases equity in a company, the price per share they pay is the 

. The larger the fully diluted capitalization table (remember: this represents all existing shares and any shares authorized to be issued in the future) is, the smaller an investor will pay per share and the more shares an investor will receive for a given investment. 

What’s included in the fully diluted capitalization table of a priced equity round? Well, this can be a point of negotiation between the entrepreneur and investors.

There are three key factors that impact the fully diluted capitalization table:

Whether or not the above factors are included in the fully diluted capitalization table of a financing round depends on negotiations between the investor and entrepreneur during the raise. 

The amount of dilution that occurs during a fundraising round varies greatly depending on the type and size of the round. 

That said, you can expect the following as a general guideline:

Most data suggests that dilution during Series C and later funding is highly dependent on a company’s valuation and funding needs. 

Equity dilution occurs when a company issues new shares of stock to investors, decreasing the ownership percentage of existing shareholders. 

Infrastructureto poweryour transactionsyour
transactions

Focus on creating value,
creating value, not paperwork

Our technology makes transacting simple

Design your
opportunityopportunity

Group your
investorsinvestors

Execute your
transactiontransaction

OUR USERS HAVE TRANSACTED ALONGSIDE MAJOR INVESTORS

Best in-class infrastructure

Automated processes

Control at your fingertips

Launch a Zest vehicle to suit your needs

Focus on .css-jj7cvp{display:inline;font-style:italic;}@media screen and (min-width: 48em){.css-jj7cvp{display:none;}}creating value, .css-1t8ogz1{display:none;font-style:italic;}@media screen and (min-width: 48em){.css-1t8ogz1{display:inline;}}creating value, not paperwork