The Wisest Entrepreneurs Know How to Preserve Equity(dealbook.nytimes.com)
dealbook.nytimes.com
The Wisest Entrepreneurs Know How to Preserve Equity
http://dealbook.nytimes.com/2011/11/15/the-wisest-entrepreneurs-know-how-to-preserve-equity/
7 comments
From the article: "What is the lesson here? Entrepreneurs need to not only have a great idea and successfully manage their business but also to be careful not to sell too much of the business too soon. ... In part, [Zuckerberg owning 24% of Facebook right now] was a result of aggressively setting a valuation for his company early, ensuring that Mr. Zuckerberg kept substantial ownership. A high valuation benefited Mr. Zuckerberg because he needed to sell less stock to raise the same amount of money."
The article suggests that you should fight for aggressively high valuations.
There is a flipside to this. Setting your valuation aggressively high only benefits you if you win big. As Chris Dixon and others have warned (e.g. http://techcrunch.com/2011/06/08/fred-wilson-platforms-valua...), a too-high valuation can lead to a down round if you don't meet expectations. This can harm your company and make it harder to raise your next round.
So following the advice of this article is a risky gambit. You can't anticipate all roadblocks or obstacles that could prevent your company from growing as much as you intended when you raise that money. You can't control all external factors, e.g. the economy. It's your choice if you want to roll the one-hundred sided die.
The article suggests that you should fight for aggressively high valuations.
There is a flipside to this. Setting your valuation aggressively high only benefits you if you win big. As Chris Dixon and others have warned (e.g. http://techcrunch.com/2011/06/08/fred-wilson-platforms-valua...), a too-high valuation can lead to a down round if you don't meet expectations. This can harm your company and make it harder to raise your next round.
So following the advice of this article is a risky gambit. You can't anticipate all roadblocks or obstacles that could prevent your company from growing as much as you intended when you raise that money. You can't control all external factors, e.g. the economy. It's your choice if you want to roll the one-hundred sided die.
When the time comes for the company’s initial public offering
That's where I quit reading. The time for most companies' IPO comes just slightly after pigs fly over a frozen hell. Is strategizing your way to a personal multi-billion dollar exit really how you should be running a company in the early days?
That's where I quit reading. The time for most companies' IPO comes just slightly after pigs fly over a frozen hell. Is strategizing your way to a personal multi-billion dollar exit really how you should be running a company in the early days?
I think so. If you're going to spend the better part of your life trying to make it big, at least make sure you keep the lion's share of the wealth you create, otherwise you could make the same amount of money with less risk (and blood,sweat, and tears) by working for a corporation as a highly paid engineer.
This piece really dropped the ball by failing to mention the unethical ways certain startups (I'm looking at you, Zynga and Mark Pincus) preserve equity, such as clawing back early options to key employees on pain of firing. Sleazy.
It is interesting that this article brings only very successful companies to mind. What it doesn't mention is the number of companies that have failed as a result of not taking the money in fear of giving up equity. Ultimately, if you don't have the money to keep your company afloat, everyone fails. If your company will fail without it, does giving up a little extra equity in order to make it succeed seem so bad?
Ownership isn't the important thing, it's the only thing - Felix Denis
YC's advice for founders is the opposite: don't optimize on valuation (or valuation cap, for debt)-- whether you give up an additional few percent matters less than other factors, like how much value the investors add or the time and effort spent completing the deal (and not working on product).
This is related to YC's argument for why they're worth their 2-12%: http://paulgraham.com/equity.html