Founder Ownership Math, Rainy Days, and Bigger Pies

A lot is made out of the price of a round.

It’s the one time that, as an investor, I’m not aligned with the founder at all. I want to try to buy up shares of the company as cheaply as possible (and own more) and the founder wants to give up as little of the company as possible.

That all being said, I’ve yet to meet a founder that sold their company for $100 million or more who looks back with great regret at the price they raised their seed round at.

Still, a lot of founders are worried about early dilution and how it affects their eventual outcome when the company is sold. What they may not realize, however, is that a lot of their thinking is tainted by bad mental accounting.

Consider the first money you ever take from VCs. Let’s say you are able to secure $1.5 million from investors. You go back and forth on a price and you eventually settle on a post-money valuation cap of $6.5mm, meaning you have sold about 23% of your company.


It feels like a lot, of course, because you know you’re going to have many more rounds of financing down the line—and if you have to sell 23% every single time you raise money, there’s going to be nothing left very quickly.

At least, that’s how it feels because your brain is doing subtraction. You’re thinking that if you start out with 100% and you lost 23% four (Read more...)