Question added to topic Money • June 7, 2008
In a second investment round, can the managing founder protect his equity in the company if he does not invest?
I am a manging founder and one of a group of first-round investors of a company building a restaurant chain. We are in the midst of raising capital for the first store. But if we need additional capital for a second store, I don't plan to invest again. Can I protect my equity or will it be diluted along with that of the other investors? If the second round investment is for a higher share value, is it common practice to give first-round investors a discount on reinvesting (besides their right to first refusal) or do they have to invest at the same value as the new investors?
Depending on the term sheet you signed when you first invested in the company, you may have the right to invest in follow-on rounds without diluting your equity. However, if you choose not to invest in subsequent rounds, you may very well find yourself owning a smaller piece of the company than you do now. My advice is to check with your attorney and see what anti-dilution protections you were originally granted. If you decide to try to re-cut your deal with your partners, it's better to have that discussion sooner than later.