We are in our first round of startup fundraising. We need $50,000 for business growth and we currently have one investor who is interested in investing $25,000 for 5%. He is concerned with his 5% being diluted in the future. I would like to be able to give him the ability to not be diluted however It seems unfair that my partner and I (founders) would be the only two diluting shares for capital fundraising, and the investor benefits at no extra cost. I am planning to write him an anti-dilution clause only if he agrees to open a $25,000 line of credit to cover the other $25,000 we want for growth. We would in turn pay him 5% APR on any funds used. If the LOC is every denied or canceled, so is the anti dilution clause. Is this possible to do? and does any one see any red flags from a founders stand point?
I think this is your current situation:
You offer him this:
In general, converting debt to equity is fashionable today. It lets you keep control over how much equity you give up. I would recommend it. I don't know how it allays the dilution concern (it generally doesn't), but if it does, I would use it. Be warned, though, big convertible deals all have tranches... and if you don't know what a tranche is, seek professional help or revert back to a simple deal. Converting debt to equity is not as simple as casting floats to ints.
I would not recommend paying back with 5% APR in cash, however. If you want to take out a loan, use a bank. As a VC investor, he should not want to do a cash deal, and if he does, this is a red flag in general.
The other typical structure to handle dilution concerns is to set up preference or preferred stock with voting rights on issuing new shares. And, honestly, if this is your seed round, I would recommend drawing the focus more on his relationship with you and your partner and less on the mechanics of dilution.