Point Number 7 on How To Pursue Venture Capital


“The time has come,” the VC said, “to talk of many things - Of Points and Pies and Preferences and Option Grants with Strings” (With apologies to Lewis Carroll)

“Nothin’ from nothin’ leaves nothin’.” Billy Preston

“42.7 percent of all statistics are made up on the spot.” Stephen Wright

Know your ownership position. In our last post, we discussed being prudent about what you say to the venture capitalist or fund management. This post, however, is about being careful about how the raising of capital affects share of ownership and business success.

Don’t sacrifice your start up to the false god of majority ownership. It’s a common mistake to view ownership and control in a one-dimensional framework. What could be simpler, there are hundred percentage points and if you have more than 50 of them, you’re the boss, right? And that’s a good thing, right? To which I respond: “no” and “maybe.”

The venture capitalist’s model capital structure is not based on a simple division of ownership (we’ll talk about that next time). There are plenty of good reasons for this, and it’s mutually beneficial to investors and entrepreneurs. For example, you might own 51% of common stock, but when you take into account anti-dilution rights, preemptive rights, adjustments to conversion rates, participating versus nonparticipating preferred, clawback’s, vesting schedules and other parameters, it’s very hard to know what your share of the ultimate pie might be. Furthermore, owning 51% of the fully diluted common stock does not guarantee control. With the VC investment will come new board members, and rights to take control of the board if the company misses milestones. That’s not to say percentage is not relevant, just that it’s not simple. All things being equal, (which never happens), a higher percentage is better than a lower one, but when the bargaining starts it is easy to make too much of that.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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