[ry454]

Yup, that's the reason I've turned down all startup offers so far and some of them offered 2-3%. They like to hand wave about how much these 50,000 shares are going to cost or how rich I'm surely going to be even after dilution of these 2-3%, but when I tell them point blank that with my current compensation, over the course of 4 years I'm going to lose at least $1M, and ask them what I would get for a $1M investment, they suddenly struggle to find words. The reality is that, once you reach this level of miniature wealth and competence (and that happens quickly), the only next step is to start your own company. Startups don't really see employees as partners.

[mlyle]

> They like to hand wave about how much these 50,000 shares are going to cost or how rich I'm surely going to be even after dilution of these 2-3%, but when I tell them point blank that with my current compensation, over the course of 4 years I'm going to lose at least $1M, and ask them what I would get for a $1M investment,

There's a thing you're missing here, and it's option value. You don't commit to the lost money over 4 years all at once, while a cash investor does immediately give up present-valued money. Instead, you commit to spending a year or so there (~$250k-valued), and only if your options look like they're going to be worth a whole lot do you stay beyond that point.

[ry454]

That's a valid point, but if we think about it, what does the founder do with that instant $1M grant? Most likely the founder spreads this $1M over the next few years on employees and other expenses according to his plan, hoping to get the next, bigger, grant. In other words, there is no advantage of having the entire amount upfront (except maybe the lost possibility to invest into short term treasuries with tiny return).

[mlyle]

The investor has committed to the entire amount. If something materially bad happens the day after the raise that halves the value of the company, the investor can't flee and the management team can still spend the money if any business prospects at all remain.

You raise an amount that will get you to the next capital raise, and convince other entities that you are sufficiently capitalized (banks, lessors, contract counterparties, prospective employees), and deal with a moderate amount of contingency. You don't want to excessively raise, because it's excessively dilutive when capital is expensive. You also don't want to have to raise again with nothing to show for the spent cash.

Even if we grant your statement "there is no advantage of having the entire amount upfront"-- there would be a benefit to the investor of having option value about whether to continue to invest; option value that an employee has. It's easy to model this and see that option value is quite valuable. (Investors would really like it, so we do see things like efforts at tranched investments or leaving a round open... but entrepreneurs hardly want to have to sell an investor equity at the same price if the investor decides he wants it a year from now).