Equity puzzle for start-up companies

Entrepreneurs often ask, do we want to reserve equity for investors? This article, a complete display of the different stages of the enterprise equity evolution process. After reading, do you already have the answer? Assumption 1: A start-up company from idea to listing to carry out three financing: a round: validation model; B Round: development, replication mode; C Round: The formation of scale, to become the industry leader, to meet the listing requirements. Assumption 2: Company development needs to constantly have the elite to join, the company will continue to take out shares to team members. Suppose 3: Each round of VC capital comes in, the company is about to dilute 25-40%. Assumption 4: The company's performance is well developed, and each round of financing is valued on the basis of a previous round of price doubling. It's called a premium, the term VC is called up round, but the start-up company inevitably ups and downs, sometimes the company's money burned, the performance has not been up, the need for someone to invest, such a company at the negotiating table does not have the weight, the other side is willing to invest, but the valuation is very low, or even lower than Entrepreneurs have no choice but to recognize a discounted price for new investors to come in, which is called down round, a bit cheap "meaning. Well, let's take a look at Huangmach's share of the jigsaw: How many shares should a start-up start? This is the first real problem many entrepreneurs encounter when they set up a company. There is no standard answer to this question, it is recommended that the start-up team first send about 10,000,000 shares. On this basis, after three financing and team options, the company's total stock will reach 100,000,000 to 150,000,000, if the price per share of the listing is 8-10 Yuan, the company's market value will be 8-1 billion, as long as the valuation over the issue prices, Immediately become everyone envy billion dollar company. There is another reason to set the number of shares in 10 million shares. Is the future when the employee gives an option, take out 0.5%, for a total of 10,000,000 of the company is 50,000 shares, and a total of 100,000 of the company, is only 500 shares, which is more attractive?! Remember, in the future, give the employee shares, do not give the percentage, the number of shares! Original shareholder structure shareholder list equity type shares share Huangmach/ceo common 5,000,000 50% Liu Bil/cto Common 3,000,000 30% Zhou Raili common stock 2,000,000 20% total: 10,000,000 100% Huangmach Company with its excellent team and unique idea, won the favor of VC. A round of financing is to the pre money of 3.5 million U.S. dollars to the price of 2.5 million U.S. dollars, the Post is 6 million U.S. dollars, a round of investors asked the original shareholders agreed to send 15% options to the management team, the company's employee stock ownership plan before the completion of a round of investment implementation. Huangmach got a lot of VC money, the teamIt also accounts for nearly 60% of the company's shares. Before a round of investment, the shareholders of the company's stock ownership plan after the implementation of the shareholding Structure shareholder list equity type shares the proportion Huangmach/ceo common stock 5,000,000 42.5% Liu Bil/cto Common 3,000,000 25.5% Zhou Raili/coo common stock 2,000,000 17.00 % employee shares common stock 1,764,706 15% total: 11,764,706 100% in general, VC will require employees to plan to invest in VC before the implementation, so VC can reduce dilution. But can not think that this is a round of VC selfish, to know that B round VC will also require before they come in to carry out an employee stock ownership plan, when a round of VC and founder shareholders will be diluted together. How much should the employee's option ratio be left? There is no standard answer to this question, which is generally 5-15%. The original stocks of startups are precious, though they are of little value to many people. Equity structure Shareholder List Equity type of post-investment company (after employee stock Ownership plan execution) share share Huangmach/ceo Common 5,000,000 27.63% Liu Bil/cto Common 3,000,000 16.58% Zhou Raili common stock 2,000,000 11.0 5% Employee shareholding common stock 1,764,706 8.75%a round Investor's preferred stock 5,042,017 25.00%a round Investor (with cast) preferred Stock 3,361,345 16.67% total: 20,168,067 100% as you can see from the table, a round-melt There is a leading VC (lead investor) and a VC. As the name suggests, VC is responsible for the entire project negotiations, due diligence, legal documents ... With VC follow the lead VC put some money, but sometimes drag with VC come in with a strategy to consider a step chess, more than said later. Even if there are several investors who are involved in this round of financing, some are engaged and some are voting, but they are regarded as a whole, who sign the same legal documents and enjoy the same interests and obligations. Alas, the biggest problem for startups is uncertainty ", especially the validation model." Look, despite the money, Huangmach's company has had a bottleneck in management and business progress after a turn in. Product testing errors, not on time to market, income did not come in, soon, a round of financing has been burned, while the B-round investment negotiations dragged on, B-round VC insisted B-round of the pre Money for 5 million U.S. dollars (less than the A-round Post money), B-round VC 3 million U.S. dollars, Post cash for 8 million U.S. dollars, B-round investors also asked to leave the future team 10% options, and a round of VCThe terms of the contract in the B round of financing if the stock price is lower than the A-round post money,a round VC (!!) ...... Siege, the company is at stake, and Huangmach and his team have to agree on the terms of the B-round VC The equity structure of the company (after the implementation of the employee shareholding plan) The shareholder list equity type shares the proportion Huangmach/ceo common shares 3,991,597 7.07% Liu Bil/cto common stock 2,394,958 4.24% Zhou Raili/coo common stock 1,596,639 2.83% employee shareholding common stock 3,781,513 6.70%a round investor Preferred Stock (subordinate) 14,117,647 25.00%a round Investor Preferred Stock (subordinate) 9,411,765 1 6.67%b stock 21,176,471 37.5% total: 56,470,588 100% Thankfully, the company is lucky, b round VC money finally in a round of the money to burn the day came in, the company incense constantly! Please note that The preferred shares of a round of investors are now noted as subprime. This is the guild, the last VC in the priority is the highest, the last round of VC is secondary "priority, and then the next round is secondary." These priority levels will take effect in the event of a profit, for example, if the company to liquidation, broken pots broken cans sold back money, the most preferential VC first take, there are many words, secondary priority VC take, there are more, secondary VC take, the last remaining, is the entrepreneur; Another point: The number of shares in a-round investor has increased a lot in the table above, that is because a round has the dilution "clause, in order to maintain the share of the B-round jigsaw" percentage, must either let the entrepreneur take out a part of their own shares to a round of VC, or let a round VC to 0 cost to gain a part of the shares, Here is the use of a round of VC to 0 of the cost of the way to gain shares ... Think of sadness, entrepreneurs hit the land, divided the interests of the last one, the first to support the entrepreneur's early VC, the same, the priority of the division is very low, on the contrary, the IPO before the killing will come in VC, instead of the highest priority, waiting for peaches to eat, alas, maybe this is the reason, Few people are willing to support the early entrepreneurial team, everyone wants to take your IPO roller coaster, I hope these priority level, will not create a gang of class enemies Wow! B round after the financing is completed, Huangmach and his team learn from the lesson, adjust strategy, focus and focus, the new money in a point not to spend, the shot, all used in the knife, the result hit! At this time the VC finally all see the opportunity, everyone is willing to pay out support Huangmach the company quickly bigger, So the company's board decided to melt the C round, this round of financing the company will almost have to be ready to go public. C Round financing negotiation is very smooth, the valuation is also very high, 6 x, that is, the B-wheel post money 6 times times, to 48 million yuanThe Pre money (x 6 = 4800) melted 30 million dollars. Of course, the C-round investors also proposed to strengthen the core of the listed team, such as the introduction of the CFO, Sales Vice President ... The option pool has increased by 5%. Equity structure Shareholder list Equity type of the post-investment company (after the employee stock ownership plan is executed) share the proportion Huangmach/ceo common 3,991,597 4.13% Liu Bil/cto Common shares 2,394,958 2.48% Zhou Raili/coo common stock 1,596,639 1.65% members Common stock 6,753,649 6.99%a round Investor Preferred (secondary) 14,117,647 14.62%a Round Investor Preferred (secondary) 9,411,765 9.74%b round Investor Preferred Stock (subordinate) 21,176,471 21.92%c round Investor Preferred Shares 37,151,703 38.46% total: 96,594,427 100% proven teams, clear targets, plus sufficient capital, Huangmach company, IPO plan mentioned on the agenda, selected listing location, underwriters, Determined the road performance itinerary and strategy, hey, the thriving company is refreshing, not to mention, listed after the company will be a large series of millionaires ... Let's give them a price and see how thick their future wallets are, assuming the company takes 20% of its shares to the market, 8 dollars per share: The equity structure of the IPO shareholder list Equity type shareholding ratio Huangmach/ceo common shares 3,991,597 3.31% Liu Bil/cto common stock 2,394,958 1.98% Zhou Raili/coo common stock 1,596,639 1.32% employee shareholding common 6,753,649 5.59%a Round investor common stock 14,117,647 11.69%a round investor common stock 9,411,765 7.79%b round Investment People common stock 21,176,471 17.54%c round investor common stock 37,151,703 30.77% stock 24,148,607 20% total: 120,743,034 100% Note No, listed, the company's stock priority cancellation , we all become common stock ", because the company listed, the entrepreneurial period of those risk prevention is not necessary, VC think is as soon as possible, put on the body wear old clothes off, throw to the two-tier market let shareholders go to grab it. See it, entrepreneurial really good, Huangmach, Liu Bil, Zhou Raili value of tens of millions of dollars, this life is all done, eat and drink is never worry! But the Huangmach team is not in the B-round.Somersault, not to be a round, B-round of VC chewed out several ribs, they may now be worth doubling ... In any case, Huangmach or cowardly, entrepreneurial brothers to learn from him! Several additional notes: Early start-up company's corporate value is difficult to estimate, VC also nothing but according to the proportion and investment funds justified out a few numbers just, does not mean the real value of the company "how much money." However, early corporate shares are invaluable and entrepreneurs should cherish them. The growth of start-up companies is reflected in the appreciation of share prices. The faster the revaluation, the less diluted the financing. Of course, the company can be a good budget to save money, the less the number of financing, the smaller the dilution. For example, the initial start-up cost 30,000 yuan, equal to almost 1% of the company's shares, after the C round, 30,000 dollars not even 5e-06%. So, do not burn money, can not find VC, it is best not to find. Founder bones to be hard! The valuations of the above IPOs are simplistic and do not take into account the size of the company's revenues and profits. The equity of the start-up company is not circulated before the listing, the valuation is not clear, there is no market price, give the employee shares if the percentage, who can not say that 25%, 15%, 1%. 0.1% ... How much is worth. Give them the number of shares, whether given 500 shares, 5000 shares, 50000 shares, you can suggest that people think: when the company listed when the stock price if it is 10 yuan, a simple calculation will know how much the shares will be worth at that time. mentioned above to drag a VC to come in is a strategic consideration of a pawn ", explain:" The early VC investment and entrepreneurial like, avoid incense broken, as long as the company can live, there is hope. Therefore, an important task of early VC is to be able to bring the next round of VC into the company. Maybe you think when you put the money of a round of VC burned, you can let a round of VC hit a little bit come in? No, this time a round of VC money can not be so simple, VC is not just because you have spent, and then give you a sum of flowers, it is illegal! Specifically, if I voted for a, the valuation of this round is what I believe Then I can't set my own price and put a little money in. I have to find a third party to the new investors to identify the price, in the B-round I can not be a vote, but to follow. This is the VC industry rules, otherwise, I can set a price of 5 million, B turn 10 times times into 50 million, C round again 10 times times into 500 million ... This is insider trading "and does not represent the market price of this company." Therefore, VC investment in each round of financing, must be new Third-party VC to recognize the price. One is because to keep the incense constantly ", the second is because of future financing pricing power", so I will be in a round when the foreshadowing, inviting a VC followed by a little money, buy a ticket with me to watch you act, if you play well, the next play ticket price maybe this VC is willing to decide, and I can easily with the cast, Then watch you go on with the show. After-class exercise assumes that Huangmach's company a round of financing comes in business development smoothly, B round vC to the A-wheel post money 3 times times the valuation, that is, 3 = 18 million, input 2.5 million, please calculate the B-round of the captable; according to your B-round captable calculation of the C-round captable, the valuation Ibid., 6 X, that is, B-round post money 6 times times, Into 30 million dollars, the captable of the IPO by the same conditions, that is, the company took out 20% of the shares to the market, each share price of 8 U.S. dollars. Compare, in the captable of the IPO that you calculate, Huangmach's price is higher than now?