Global Themes

On Globalization & Venture Capital

“How much should I expect, end of the day?”

I promised earlier this month to highlight some of the most common questions that entrepreneurs have about venture capital financings and related topics…and I hope some of you managed to read Max‘s thoughts on “how much equity should you give up?” which I used to begin my series.

A few days ago, I came across Krishna Mony’s excellent blog and found this post on his site: “How much to hold back?” 

Its a neat and well-written expplanation of the basic maths behind how much equity could founders expect to have at the end of the day? Over to Krishna:

“Most of the startup entrepreneurs have this persistent question on valuation. Let me now direct them to read this before they have my hair for splits. From now on, I would look forward to something more intelligent from them so that it tests my skills at a significantly higher level calling for some sophisticated financial modelling.

“So how much should I expect to own at the end of the day? ” is that question.
It all depends on how capital efficient you are. If you need to raise $5M followed by $15M followed by $20M, there is not much pie left at the end of the day.

Let’s see what that looks like:
Seed/early : $ 5M at a $5M pre-money leaves you with 50%
Expansion : $ 15M at a $15M pre-money leaves you with 25%
Later stage : $ 20M at a $40M pre-money leaves you with about 16%
Back out 8-10% for equity to other managers, warrants, founders, etc and you have 6-8% left over.

Unfortunately, too many entrepreneurs don’t think this through completely and are extremely resentful or disappointed at the end. Furthermore, if things don’t go as planned the money could come in at much lower valuations or you might need to raise more rounds.

In a capital efficient play, you end up with a much greater share. For example:

Seed/early : $1M at a $3M pre-$ leaves you with 75%.
Expansion : $3M at a $12M pre-$ leaves you with 62%.
Later stage : $3M at a $27M pre-$ leaves you with 56%

Back out 8-10% and you have over 45% still in your possession. You’ll notice that I even used lower pre-$’s in this second example and it still came out significantly ahead (nearly 7x).

December 23rd, 2006 Posted by | Entrepreneurship, FAQs for Entrepreneurs, Venture Capital | no comments

No Comments »

No comments yet.

Leave a comment