Lesson #15
Everything You Wanted to Know about the “D” Word but Were Afraid to Ask
Most entrepreneurs hate the “D” word—as in dilution—but dilution is not a negative in my vocabulary. This term refers to the percent of ownership one gives up when selling new shares or units to another investor. Here's an example: Let's say you own 1,000 shares valued at $1 each, which represent 100 percent of the business. If you then sell 500 more shares to raise money to grow, you would be diluted by 50 percent, even though you still have the same 1,000 shares.
The only question that matters when it comes to dilution is whether you would rather have a smaller piece of a big pie or a bigger piece of a tiny pie. An entrepreneur is almost always much better off with the former. I've found it best to find ways to keep control even though I wasn't the largest investor. This is particularly true when you become a major enterprise with institutional investors.
I was petrified of the D word when I began OfficeMax, and guarded my equity in the business like a hawk. I was afraid to add more ownership, because I knew it would decrease my—and other existing investors'—shares in the company. However, this concern didn't last long; I quickly came to my senses and realized that there was no way I could build a business of any significance without OPM. First of all, I just didn't have enough money of my own. Second, I needed others to share my risk by contributing money instead of leveraging everything I owned ...
