« Boston VCs gets first look at Y Combinator Demo Day | Main | Digg-nation is HUGE! Community is more powerful than money or technology »

August 11, 2007

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341bf9da53ef00e3933a4e0a8834

Listed below are links to weblogs that reference How much equity for investors and employees?:

» Metagg is tracking this post from Metagg
Find out what Social News Sites are discussing this post over at metagg.com [Read More]

» How Much Equity For Your Venture Capital Funding and Employees? from David Dalka - Creating Revenue and Retention - Chicago GSB MBA
As discussed in my recent post about a TiE event on Chicago start ups, there are many factors to consider when taking in funding and employees. Don Dodge discussed in great detail Paul Grahams The Equity Equation post. So Id like to ask t... [Read More]

» How much equity for investors and employees? from PSST! it
Founder conundrum. How will my equity numbers look? Don Dodge spells it out clearly what you should expect your equity to look like pre and post funding. Obviously every situation, startup, and market [Read More]

» Your Piece of the Pie from The Post Money Value
I've seen a few prickly (aka rude) comments regarding Don Dodge's recent column on equity, sharing, etc. For the record, Don is a guy who has been on both sides of the fence -start up/big company- and really does have some good things to say. [Read More]

Comments

Jason

Great post !!!!!!!!

Dave

really great post don. altho i thought paul's post was on target in general, it was a little too simplistic & i think you captured most of the details well.

i also think Leo Dirac's post & presentation on liquidation preferences at Gnomedex was very enlightening as well:
http://www.embracingchaos.com/2007/08/vc-term-sheets-.html

regards,

- dave mcclure

Alan

Thanks Don. This puts potential payout into perspective for those thinking about founding or working for a startup.

chris

Great post, Don. How often are you seeing immediate/accelerated vesting upon change of control? I see the temperature changing in this regard...

Dave Schappell

Great post -- I enjoyed your post in tandem with Paul Graham's.

For folks who want a spreadsheet that lays out Paul's formulas (yes, they're simple... but it's helpful to iterate with actual numbers), I've posted it here:

http://www.nosnivelling.com/Paul Graham equity formulas.xls

Dave Schappell

Don -- this version may have a better URL for Paul Graham's Equity Formulas spreadsheet -- my apologies:

http://www.nosnivelling.com/Paul-Graham-equity-formulas.xls

Mario

"The second and third rounds of funding take additional shares of equity and dilute existing investors and founders. Founders usually end up with 10% to 20%, all the other employees end up with about 15%, and the VCs end up with about 60% to 75%."


This is just disgusting!

If the contribution investors make to the success of a startup is so valuable like that, well, they shouldn't even bother to look for entrepreneurs. They could do it all by themselves.

Except they can't! They have always been clueless actually.

Even the founders of companies like Cisco had to go through dozens of VC's untill someone gave them the money to start that company (and, in that case, only to completely screw them later).

Web startups, which I presume is the kind of main interest amongst your readers, can be started completely without VC's.

And, even when they are absolutely necessary at some point, it's only after the startup's product, strategy and maybe even its revenues are already well established.

In that case, VC money is used mainly for "acceleration" and not for bootstrapping.

Obviously, they shouldn't get that indecent amount of equity that you suggested at the expense of the founders.

And if you think I'm wrong, just take a look at Facebook's history.

Or, even better, considering the entire software industry history, ask your ulitmate boss at Microsoft what he thinks about your post.

And, by the way, please don't mention Paul Graham's articles as if he would agree with the kind of nonsense you say about equity.

Anyone who has ever read his articles know he wouldn't.

Mario.

Don Dodge

Mario, I agree the venture investing landscape is changing. One of the points of my post was to encourage entrepreneurs to get to keep expenses low, get to revenue as fast as possible, and avoid multiple financing rounds and equity dilution.

Venture Capital investing is extremely risky. Most startups fail. That is why the equity dilution is so high. Believe me, if startups could get bank financing at any interest rate they would do it. They can't. So, risk capital like VC money is the usual alternative. The equity dilution over multiple rounds of funding is a fact of life...one that some people don't understand before they start down the VC road. Again, I am trying to open their eyes.

I have written many times that it is much easier, and much cheaper to start a company now. Many web 2.0 companies can get major traction without VC money. I think that is great.

BTW2, Paul Graham understands the equity process very well. Whether we agree with it or not...thats the way it is. Paul is doing great things at Y Combinator to change that. I applaud him.

Mario

Well, as I said, maybe we should ask Bill Gates what his opinions on this are.

After all, his choices in that area certainly had a tremendous effect in making him one of the richest men in the world.

And, frankly, not having a board of investors also gave him the freedom to do things like (as he often puts it) "betting the company" on new initiatives, like DOS or Windows itself.

Anyone who is familiar with the history of the industry knows how bold those moves were.

On the other hand, the guys who had the real control at Apple kicked Steve Jobs out of that company, with disastrous consequences.

And I'm not a great fan of Paul Graham.

A friend of mine is participating on the current round of incubation at Y Combinator and if there is at least some small bit of thuth on what he says about the experience, it's not so interesting at all.

I just felt that you mentioned him in a way that gave the impression that he would agree with most of what you said when, in fact, he wouldn't.

And, as we both know, he is quite popular with startup founders wannabes right now.

Cheers.

Mario.

Lee

Sorry, but how is $2 million dollars "very rich"? I don't see the point of working 5-7 years to build a 100-person company if at the end thats all you get, and most of the reward goes to the VC's. It would be much better to have a so-called "lifestyle" business in that case.

Don Dodge

Lee, I agree that working 5 - 7 years for $2M doesn't make you very rich. You seem to have missed my point.

My point was to avoid equity dilution by getting to cashflow break even as soon as possible. And that selling out early for less money could actually be a better deal.

If you go down the VC financing path you better be thinking in terms of a $500M to $1B exit. Then your 4% of the stock is worth $20M to $40M.

Jake Kennedy

I really appreciate this post. Equity participation definitely needed to be addressed. So many things that entrepreneurs don't consider stops them dead whaen they make a gaffe with private investors or VC s because they did not know what to address or how. I'll be thinking this one over tonight. I'm looking forward to the next one.

The comments to this entry are closed.

My Photo

Enter your email address:

Delivered by FeedBurner

Twitter Updates

    follow me on Twitter