Showing posts with label Initial public offering. Show all posts
Showing posts with label Initial public offering. Show all posts

Wednesday, September 10, 2014

Tech Startup Equity Distribution

English: Defunct Belgian shares in a Russian T...
English: Defunct Belgian shares in a Russian Tram company for the city of Saratov. With the Russian revolution these shares became worthless. Nederlands: Oude Belgische aandelen in een Russische trammaatschappij in Saratov. Na de Russische revolutie zijn deze waardeloos geworden. (Photo credit: Wikipedia)
100% is like the speed of light. The total has to add up to 100%.


33 to the Cofounders, 33 to the investors in all rounds all the way to IPO, 34 to the team.

When you start a company, you probably have two Cofounders, or three. One is often the Senior Cofounder, the possible Founder CEO. It could be 10-10-13, with 13 going to the Founder CEO. Or it could be 5-10-18. Or they could agree to cap themselves at 30% and give another 3% to the team. And so, 5-7-18.

But the investors have not come yet. The team has not been built yet. The Founder, or the Cofounders could keep the rest of the equity in a caretaker capacity. So, 5-7-18 could become (5+15)-(7+25)-(18+40), with the caveat, should a Cofounder leave the company, the equity held in caretaker capacity reverts back to the company. Even the 5-7-18 should have a vesting period of, say, five years. So if the Cofounder at 5+15 leaves after one year. The 15% goes back to the company. And he/she walks away only with 1%. Because the other 4 has not vested yet.


I am for an anti-dilution clause. Say you raise 50K in your first round to give away 5% of your company at a million dollar valuation. The anti-dilution clause makes sure that 5% stays 5% in all future rounds. Otherwise, without the anti-dilution clause, a round 1 investor could put in money, feel like he/she owns 25% of the company, but by the time there is an exit, that person ends up seeing that the 50K they invested is still 50K when they walk away from a successful startup's exit. I think that is a shame. And it happens all too often.

Say, it is 30-35-35. Then 5% is gone. And 30% to go.

Round 2 you raise 500K at a 10 million dollar valuation. That is 10% gone with 25% to go. Round 3 you raise 2.5 million at a 50 million dollar valuation. That is 15% gone. There has been an anti-dilution clause at each stage. That makes each round of fundraising independent of each other.

You go IPO at a 100 million valuation. You raise another $5 million at that valuation. That is 20% gone. Hopefully your company keeps doing well, and you raise another 50 million dollars at a billion dollar valuation.

The Team

This is of utmost importance. You have 35% to give away. And you have to assume some of your best people might come years later. The formula is, the higher up you are, the earlier you come, the longer you stay, the more you get. And here you want to move to number of shares as soon as possible. Because 0.1% feels like little, but 100,000 shares feels like a lot.

Your team could be five deep, or 10 deep. The Board is layer 1. The CEO is layer 2. The executive committee (COO, CTO, CFO) is layer 3. All three are not equal. The CTO might get more. The CFO might get less than the COO. Depends. Assume there are five other layers all the way to the receptionist.

I think tech startups should pay below market rate salaries as a rule. You only want people who really see the value of your equity. And the equity you give out should vest over five years.

The Board we took care of. The Founder CEO we took care of. Assume the executive team is not any of the Cofounders. Say the CTO gets 2.5%, the COO gets 2%, the CFO gets 1.5%. To vest over five years. That is 6% gone. But a COO coming in in year 3 would get less, something like 1.5%, or even 1%. Also to vest over five years. Unless you get a star CFO in year 2 who is good enough to take the company IPO, then you can be a little more generous. How about 1.5% to that CFO in year 2?

A superstar CTO might be worth 3%. I don't know.

The thing about the lower layers is there are more people in those layers. That further reduces the size of their cake.

Layer 4 might get 3% total. Or you might say, 3% for each layer with a cap of a certain percentage points for each layer.

Layer 4 gets 3% total, but an individual may not get more than 0.5%, something like that. But if there are 10 people in layer 4, they get 0.3% each on average. Some might get 0.2%.

Layer 10 people might get 0.05%.

Number Of Shares

At a 100 million dollar valuation, the company has 100 million shares to give at a dollar each in value. So at a two million dollar valuation, the company shares are worth two cents each.

So 0.05% in equity is actually 50,000 shares, which is a lot. The junior most members of the team will probably be looking at something like that, again, to vest over five years. You don't have to buy them. You just have to stick around, work hard, and your shares keep vesting.

Wednesday, May 07, 2014

The Alibaba IPO

AliBaba (Photo credit: Stewf)
I never doubted Marissa Mayer's fundamentals as a tech executive, I think she is a trailblazer, but cynics claim 100% of her "success" at Yahoo can be attributed to Yahoo's stake in the Chinese tech giant Alibaba. Alibaba sells actual things. This is a signal that investors in America and other developed markets need to eye other emerging markets. There is an Alibaba waiting to happen in India, in Nigeria, in Brazil. And just like one Craig's List has fragmented into dozens of new, massive companies, and one inbox has fragmented into dozens of massive companies, Facebook among them (since you shared pictures over email before Facebook came along), I think Alibaba itself is a signal the Chinese ecommerce market can be broken up into smaller, more well-defined pieces. Alibaba's number one thing is ecommerce. There is a lesson. That you need a local approach to ecommerce in unique markets like China, and homegrown companies are best served. Other than founding Yahoo, investing early in Alibaba might be Jerry Yang's major masterstroke in life.

The Chinese are coming!

Alibaba Files to Go Public in US IPO of E-Commerce Giant
Founded by former English teacher Jack Ma, 49, in a Hangzhou apartment, Alibaba started with a few dozen items for sale. Alibaba’s market value is estimated at $168 billion, bigger than 95 percent of the Standard & Poor’s 500 Index -- and the most valuable Internet company after Google Inc....... Alibaba now provides various marketplaces for buyers and sellers, as well as services that help them conduct their businesses. Taobao Marketplace, founded in 2003, enables millions of individuals and small businesses to sell products. operates as a virtual shopping mall, with retailers and brands offering products. Alibaba’s other businesses include Juhuasuan, a flash-sales model, and eTao, a shopping search engine.
Alibaba’s Massive U.S. IPO Could Top Facebook’s Debut
Last year, the Chinese e-commerce business that is part-owned by Yahoo handled $248 billion in transactions, more than Amazon and eBay combined. ..... If successful, Alibaba’s IPO could eventually value the company at substantially more than $150 billion ...... a windfall for Yahoo, which owns 24% of the e-commerce giant...... dominates the Chinese e-commerce market, powering four-fifths of all online commerce in that country ..... the company also operates a digital payments service and a cloud computing business..... Alibaba accounts for about 75% of Yahoo’s valuation ...... At $200 billion, Alibaba would be worth more than U.S. tech titans Facebook and Amazon, but it would still trail Apple and Google, the world’s two most valuable technology companies. ..... Last year, Alibaba handled $248 billion in online transactions ... more than Amazon and eBay combined. ....... Alibaba’s meteoric growth has been powered by economic and demographic trends in China, including the ongoing emergence of a large, tech-savvy middle class. In its IPO filing, Alibaba cited China’s population of 1.35 billion people, including 618 million Internet users. The company said there are 500 million mobile Internet users and 302 million Internet shoppers in China. ..... There is less of a retail culture in China, ie. ‘Let’s go shopping on Sunday,’ ..... “The bottom line is that Yahoo’s stock continues to be driven by Alibaba results”
Yahoo’s Alibaba Stake Is Valued at $26 Billion
its stakes in Alibaba and Yahoo Japan, another Asian asset where it has a stake estimated at $9 billion..... Together, those holdings are worth about $35 billion, just under Yahoo’s current market capitalization of $36.7 billion. ...... Yahoo paid $1 billion for a 40% stake in Alibaba in 2005 and in 2012 Alibaba agreed to repurchased more than $7 billion in shares. Yahoo now owns 22.6%, according to Alibaba, and is required to sell 208 million shares in the IPO, worth $10.4 billion based on the most recent fair value. ..... Alibaba paid Yahoo $561 million in 2012 to license its intellectual property
With Alibaba IPO filing, pressure mounts on Yahoo
Marissa Mayer has dramatically changed the story line at Yahoo during her nearly two years as CEO ..... But even as Mayer has moved Yahoo away from under the cloud of worry which dogged it for so long, she'll soon be under growing pressure to prove that the company's turnaround is for real and not simply the result of a brilliant investment decision almost a decade ago. ...... In 2005, Yahoo co-founder Jerry Yang led the company through an investment in the little-known Alibaba, ponying up $1 billion for a 40 percent stake in the company. Today, Alibaba is valued anywhere from $150-$250 billion. Yahoo currently owns a 22.6 percent stake in the company. After Alibaba's IPO, Yahoo could end up with $12 billion in cash on its balance sheet ........ the challenge Yahoo faces as it seeks to compete in all these areas is that the incumbents are some of the fiercest names in technology: Google, Apple, Amazon, Netflix, and others. And without the security blanket of leaning on Alibaba's might during earnings reports, the pressure is on for Mayer to find something else to fill the void.
Alibaba's $1 billion IPO: The numbers to know
Known in the U.S. primarily for its association with Yahoo, Alibaba is an eBay-meets-Amazon and then some kind of business....... Most of Alibaba's revenue derives from online marketing and ads. Other revenue streams include membership and transaction fees, value-added services, and cloud services.
Meet Alibaba’s Jack Ma
Chinese Giant Alibaba Files for IPO, Perhaps the Largest in U.S. History
How Alibaba could change American business
Alibaba Sees SoftBank’s Masayoshi Son Staying on Board Post-IPO
10 Surprising Things You Can Buy Using Alibaba
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Sunday, November 25, 2012

Facebook's Sad IPO's Wide Toll

I think Facebook's sad IPO was a wakeup call to many. The mobile trend is unmistakable. But I don't think it is wise to write off the web. Mobile is hottest, true, but the best applications will be platform agnostic.

Fred Wilson: What Has Changed
VC funding of consumer web and mobile companies is down 42% in this first nine months of 2012 (vs the first nine months of 2011). ..... google, facebook/instagram, amazon, microsoft, apple, twitter, ebay, yahoo, AOL, craigslist, wordpress, linkedin together make up a huge amount of the time spent online, particularly in the english speaking world ..... tumblr and pinterest have risen a lot in the past couple years ..... the consumer is moving from desktop/web to mobile/app ..... most new consumer internet startups need to build for iOS, Android, and web at the same time ..... distribution is much harder on mobile than web and we see a lot of mobile first startups getting stuck in the transition from successful product to large user base. strong product market fit is no longer enough to get to a large user base. you need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master. ...... We are small on purpose ... We want to invest in a tiny slice of the early stage ecosystem where our thesis collides with great teams and unique and differentiated products. ...... we are seeing fundraising challenges everywhere, even in our very best portfolio companies .... it is a tougher time for early stage consumer internet companies than I have seen since the 2001-2004 time frame. And I think we are still in the early innings of this more challenging environment. ..... the wind that has been at our back for 7-8 years in consumer internet is no longer there
Wall Street Journal: VCs Still Chasing Web Companies, But With Less Cash
Overall the amount invested in consumer information services was off 42% in the first nine months as the difficulties of newly public Internet companies such as Facebook and Zynga cast doubt on the business models and valuations of social media companies.
Dave McClure: What Hasn’t Changed: The Internet Keeps Getting Bigger.
most VCs switching from consumer to enterprise are clueless about why they’re doing so ..... The number of recent internet services that have grown from nothing to hundreds of millions of users is frankly rather astonishing – Pinterest, Instagram, Groupon, Zynga – all of these took less than a few years to get to hundreds of millions of users and in some cases billions of revenue. ..... what we are seeing with the smarter funds – they’re waiting until Series A or B when companies have clear traction before they jump in, when they may require larger amounts of capital to finance growth. ...... many companies can get to break-even without raising big rounds of venture capital, and may simply choose to operate on their own cashflow, or perhaps debt-based financing. ..... monetization keeps getting better and better, and exits are getting earlier and more often. ..... as online payments and monetization improves, again we will see less need for venture capital to finance customer acquisition for successful internet businesses. ..... There will be thousands of small wins, but larger funds can’t handle the scale required to do so many small investments. Maybe we need something like the SBA small business loan equivalent, but on the the equity side
Om Malik: Who Says Startups Are Easy?
The economics of attention is much more ruthless and unforgiving than the real economic underpinning of a product. Just as it is hard for a movie to recover from a bad opening weekend, today’s “apps” lose if they don’t make a good first impression.
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Monday, August 06, 2012

Zynga And Mobile

Zynga and Facebook are in the same boat. They are both trying to figure out mobile.

Zynga's Rocky Shift to Mobile
To turn around its flagging business, Zynga Inc. is betting big on mobile games and creating a network that connects mobile-game players..... people have shifted to playing games on their mobile devices instead of on personal computers. Zynga says the number of people who play its games on mobile devices is growing three times faster than the number of those who play on the Web. .... Zynga's shares closed Friday at $2.72, down 73% from its December IPO price of $10 ..... Pincus said his vision for mobile games is to connect a large network of game players across a variety of platforms
Fred Wilson, Mark Zuckerberg And Mobile
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