Wise entrepreneurs know how to keep stakes

One of the founders of the new Oriental, Xiaoping, founder of the foundation, once said: "Meet a few entrepreneurs, in the equity structure, the beginning to let investors take control of the cause of loss, the company was done, but was driven away by investors." Entrepreneurship, is to do their own destiny, but the control of the power to give people, do not make sense. Even if you have to raise money, you have to be like Jingdong Liu, so you can have as many shares as you want, but you have to keep voting rights. ”

For entrepreneurs who want to be billionaires, it's not enough to just create a business that affects the world. Smart entrepreneurs not only know how to manage a team and grow a company, but also how to avoid investors eating up a lot of your equity.

Recently Groupon and Zynga are on the market, and Facebook is planning to go public next year, and for the founders, it's not their concern that the companies with a good momentum are listed, and they are concerned about how much equity they have in their hands.

The founders of these good companies had a flair for the company's growth, but eventually, in the harvest season, most of their "fruit" flowed into the pockets of Silicon Valley investors.

Maybe companies need a lot of money in the early stages of their start-up. If you can get VC in the start-up period of a large amount of financial support, it is undoubtedly a timely rain, even a lifeline. In return, the founder of the company is also very willing to take part in the stake, even at important times, it is necessary to take out most of the equity.

But although VC requires high returns because of high risk, the founder should be aware of the problems he will bring in the early days of financing, while most founders are busy making the company bigger, but often ignore the importance of the problem.

Now let's take a look at a few examples:

In the early days of Groupon's inception, Lefkofsky invested 1 million of billions of dollars in start-up money for founder Mason, in other words, having sold a stake before Groupon started. After Groupon hit, the company began to grow at a high rate, and Groupon retained a stake in Mason and Lefkofsky in late-stage financing. Finally, founder Mason accounted for only 7.5% of the entire stock, or 1.2 billion, and Lefkofsky shares were 21.5%, 3.2 billion. Investors have a full 2 billion more than the founders.

Zynga was founded in 2007 by Mark Pincus, and in 2008, Zynga received 10 million of its investment from three VC companies, and in the ensuing three rounds, Zynga continued to sell shares and the last time Zynga valued $10 billion. Finally, founder Pincus still holds a 19% stake in the IPO, apparently Pincus is better at financing management than Groupon founder Mason.

Zillow founded in 2005, the company's co-founder is Richard Barton and Lloyd Frink. And they were more beautiful, and they still had 41% of the company's shares in the July IPO. And now the market value is about 800 million.

And for CMO Angie Hicks and CEO William S. Oesterle, Angie's list of at least millions of of the market that will be listed this week, they are pathetic. The 1995-Strong company, now 63% per cent of its shares, is held in three venture capital funds and T. Rowe Price's hands, while Hicks only 1.8% of the shares, Oesterle is 7.5%.

The founders of Pandora and Boingo only had a small stake in their IPO.

What should we learn from entrepreneurs?

First, entrepreneurs need to be careful not to sell too much of their shares at the same time as they realize perfect idea and successful management of their own company.

Second, the longer the company's IPO, the more it needs to rely on external financing. Unless companies are growing fast before VC investments like Groupon and Zynga. Otherwise, the founder's shares may be diluted before the IPO, pay attention to this and try to avoid it.

Next year's upcoming Facebook is a good example of an aggressive evaluation of the company's value in the early days of the company, making Mark Zuckerberg still holding a 24% stake. The higher the share price, the less shares the enterprise will pay to get the same financing. Mark Zuckerberg's sister, Randi Zuckerberg, did not realise the true value of Facebook, as long as she joined the company and didn't share the money. Zuckerberg said to her: "Believe me, what you don't want right now is exactly what you really wanted." ”

Of course, Zuckerberg only has 1/4, not 1/2.

The rationale for this article is simple, but few entrepreneurs notice it. Because they are eager to expand, eager to bring their own companies and products to the world. As the helm, entrepreneurs in the entrepreneurial process, must have a broad vision, can see the ship in the future. Always think about how the current approach will affect the future.

Also, don't feel sorry for the entrepreneurs who sell their excess stakes, they still get a lot of money when they go public, but they pay dearly for it.

Steven M. Davidoff,dealbook, author of this article, is a commentator on mergers and acquisitions.

Via DealBook

Article from 36 Krypton