The cap tables of closed-end and time-bound (the most common structure) VC funds are highly fixed (finite caps) and, by default, anti-dilutive for all. GPs have a fixed share, rarely diluted. LPs have their fixed shares — almost never diluted.
Meanwhile, the opposite is true on the cap tables of corporations these funds purchase equity from (aka startups / scaleups) : they are NEVER similarly fixed … and thus are continuously diluted.
Very regularly, VCs, founders, employees and advisors experience 60-95% + dilution (aka value destruction) of their initial ownership % over the course of a companies life for a wide swath of reasons — the mechanistic cause is the same in all cases:
Share Issuance in order to raise equity capital.
Share Issuance by corporations (requiring board approval) is mechanistically indistinguishable from central bank feds printing money (monetary inflation) in response to jobs / economic data.
High employment and low inflation are the central bank goals + justifications for printing more of the national currency / lubricating the economy (lowering rates).
High profits and low cost of goods sold are the board of directors’ goals + justifications for “printing” (issuing) more of the company currency (equity).
Here’s the problem:
From first principles, it is totally insane for central banks to print more of the national currency (or even reduce monetary interest rates, for that matter!) in order to stave off inflation (increasing prices) of goods required by the population.
Fight economic inflation by … causing monetary inflation (thus reducing the purchasing power of the currency)?
This is literal insanity.
And yet, this is what has been happening consistently and with reckless abandon over every single administration for decades now.
The only way out? Very consistent 3%+ GDP growth for the next decade.
But I’m not even sure that’s the real solution, even if realistic.
Finite, cryptographically scarce, globally decentralized and permissionless digital currency are the answer.
Bitcoin has shown this model works extremely well over the last 15+ years.
Denominated in Bitcoin, the value of literally anything has gone up by orders of magnitude over the last 15 years.
Denominated in fiat, the value of literally anything has gone down by 80-90% over the same timeframe on a purchasing power basis.
Denominated in percentage share of equity, the value held in any company has dropped in correspondence to share inflation in the absence of buybacks. This is most pernicious with private equity.
Obviously, the best model for companies is to never raise equity capital and instead choose to build products and services that generate profits as early as possible to ensure long term sustainability (which is absolutely possible but extremely rare, especially in the technology startup universe awash in trillions of dollars of capital aggressively seeking positions on cap tables of all sizes).
@Bitcoin inspired @Bittensor — which represents the first technology in history to solve the issues with highly dilutive equity (which is almost always denominated in fiat, exacerbating the issue double exponentially).
Yes, there are other solutions — companies can choose to bootstrap. Or never raise equity capital. Or just raise 1-2 rounds and stop. Or implement charter-level anti-dilution preferences for all share holders with a permanent fixed amount of shares issued with no change mechanism.
But will those band-aid approaches be adopted by a world addicted to the ever growing tsunami of VC and other asset classes coming into startups? No.
Bitcoin will fix fiat by replacing it. Eventually.
Bittensor will fix equity by replacing it. Eventually.
Until then, what we will witness is a long journey of evolutionary resistance to these eventualities by those who possess only partial conviction on the root cases of inflation.
Joseph Jacks’ Personal Blog 