Raising seed capital without too much dilution

My company is in the process of raising additional capital for my semi start up website. Currently we are in a beta testing phase with the intent of testing the functionality of the site on a larger scale. At the moment we have a few hundred registered users but have not gained a tremendous amount of traction to this point which has been done on purpose.

We have met with a couple of investors to date but considering the stage we are currently in as a start up, they are wanting a bit too much equity than we are comfortable giving up. However, I am of the addage that its better to have a little bit of something then a lot of nothing! I have explored and understand the convertible debt to equity concept and of course there is just a straight equity swap, but I am looking for other ways to limit founder dilution in case additional equity might be needed moving forward.

I have heard of deals being structured in ways that allow the "founders" the ability to give up a little more equity in the short term with the long term goal of buying it back. Essentially ways to structure deals that in the long run cause minimal dilution. Obviously I realize that if I want the money I am going to need to part with equity on some level but if anyone has any additional suggestions I would really appreciate it!

Thanks in advance for all of your time and consideration!

-Robert J. Dolle

A common way to do this would be to have the angel investors loan money to the company, with an option of converting that loan to shares if there is a follow-on larger investment. This allows the angels to invest without having to agree on a valuation until you have a lot more traction.

For example, the angel/seed investor might put in $100,000. When the Series A closes, the angel investor will have the right to convert their $100,000 into preferred shares at, say, a 10% discount. So for example if the Series A prices shares at $1, the angel investor will find himself owning 111,111 shares. Say the Series A valuation is $2,000,000 premoney - now the angel owns 111,111/2,000,000, or 5.56% of the company.

A bit of general advice. If you think the seed investor is taking too high a percentage of ownership, either you're wrong, or the investor is wrong, but in either case, you shouldn't be doing a deal :-) Some investors try to take huge stakes in exchange for very small amounts of money. This is almost always a really bad idea, even for the investor, because the founders are left without enough skin in the game to really care. That's why typical Angel deals these days are all just pricing at $2m - $4m pre. It's not like two Y-combinator guys with an idea are really worth $2m. It's that they really need $500,000 to get to the next level, and taking any more than 25% at this early stage will not leave enough equity to get the company to the finish line, so you just have to assume a $2m valuation or go home. Angel investors who don't understand that and try to take too much equity are setting up their companies for failure.