What?
Dilutive = money out (previous stakeholders cashing out)
Additive = money in (to company’s coffers)
How & Why?
- Dilutive:
Your pre-money valuation is £200.
I invest another £100, but £50 of that is by purchasing part of founders’ shares.
Founders pocket £50, post-money valuation is £250, I own 40% of the company
But only 50% of my investment is being used to generate a return for me. - Additive:
Your pre-money valuation is £200.
I invest another £100, all in newly issued shares.
Post-money valuation is £300, I own 33% of the company.
But all of my investment is being used to generate a multi-x return for me – the reason I invested.
Also, signaling: If existing investors are selling their stake as part of a (pre-IPO) fundraising, it may send a very strong negative signal to the market – that those on the inside don’t believe in the business. Can’t be good sign for new investors (and your company’s valuations), can it?