May 25th, 2008 Systems posted by dmerritts View Comments

Small % of a Big Pie

First time founders seem to be obsessed with the percent of the company they own. All want to maintain a large percentage. Because founders think that a large percent is required for control. After all, it’s her baby and she wants be a good over-bearing parent. Unfortunately, building and growing a company requires a team of people and capital resources. Early-on the company only has equity — preferred or common — to give in return for capable people and capital resources. Raising capital requires that some portion of the company be sold. Hiring employees also requires some pool of equity to be set aside. All of this makes for some heart-burn for first-time founders or young entrepreneurs. None of this makes much economic or financial sense to me.

I would much prefer to take on additional resources to grow the business than have a symbolic percentage ownership. In the simplest form, a small percentage of a huge company is worth more than a large percentage in a small company. For example, if I own 50% of a $5m company ($2.5m), it’s significantly less than owning 5 or 10% of a $200m company ($10m, $20m). And, the likelihood of a $5m company becoming a $200m with one person owning 50% is very unlikely. Sure it’s happened, but the odds are pretty bad.

The hurdle for most founders I’ve talked with is psychological. Without perspective each thinks that it’s imperative to maintain control and direction. But, those founders who are looking to maximize financial return from themselves and families know that owning less to get more is a better strategy. That said, make sure that the percentage that you do own after the various series and tranches has anti-dilutive characteristics.

http://blog.danmerritts.com/wp-content/plugins/sociofluid/images/digg_48.png http://blog.danmerritts.com/wp-content/plugins/sociofluid/images/reddit_48.png http://blog.danmerritts.com/wp-content/plugins/sociofluid/images/stumbleupon_48.png http://blog.danmerritts.com/wp-content/plugins/sociofluid/images/delicious_48.png http://blog.danmerritts.com/wp-content/plugins/sociofluid/images/facebook_48.png
blog comments powered by Disqus