As climate tech becomes an increasingly significant economic force, making up 10% of global venture capital and private equity, more founders are choosing to focus their efforts in this sector. This trend comes in the wake of record-breaking climate patterns, with the Earth experiencing its warmest 12 months in 125,000 years, a fact not lost on potential entrepreneurs.
However, as is often the case with emerging industries, there are unique pitfalls to be aware of. Notably, attorneys at Goodwin highlight two common issues: poor equity dilution management and stacked seed financing. Both of these challenges tend to impact climate tech startups more acutely than their counterparts in the broader venture-backed startup space.
Equity dilution management refers to the distribution and dilution of company shares as more and more funding is raised. If not handled correctly, founders can find themselves losing the majority ownership of the company they created. Similarly, stacked seed financing, where a startup obtains multiple rounds of seed funding before progressing to a full Series A round, can result in complex cap tables and cause valuation disputes.
In essence, these complexities could pose significant setbacks to the growth and sustainability of a startup. Thus, budding climate tech entrepreneurs need to be mindful of these issues while navigating the venture-backed startup landscape.
Further details and insights on these issues are provided by attorneys at Goodwin in their discussion on Law360.