Recently I was talking with an entrepreneur that has a small, fast-growing startup. Things are going well and he’s debating raising a Series A. There’s a good bit of interest from venture investors but there’s one hold up: he doesn’t want to take the opportunity of a $25 million (or smaller) exit off the table. For most venture funds, if the desired exit is less than a multiple of the fund amount, it isn’t worth it (e.g. a $100 million fund needs much bigger exits to move the needle).
Here’s what a $25 million exit might look like:
- Entrepreneurs – 70%
- $17.5 million
- 3 co-founders
- $5.775 million each
- Employees – 15%
- $3.75 million
- Investors – 15%
- $3.75 million
For the founders, potentially having the opportunity to put away $4 million after taxes (if everything goes extremely well) would be life-changing money. Based on the entrepreneur’s goals, my advice was to figure out how to grow the business as fast as possible while minimizing dilution and keeping the option open for an exit that’s still meaningful to them (this might mean raising more angel money or trying to find a debt option). Not all entrepreneurs are trying to build billion dollar companies and it’s important to figure that out before going the venture capital route.
What else? What are some more thoughts on founder value in a $25 million exit?
David Cummings on Startups 
Perhaps each founder could sell a bit of equity and put $300k in the bank each – enough to have a nest egg, but not so much that they’re not highly motivated to push very hard for a much higher exit in a few years.
Seems pretty simple to me…
Either you need the money or you do not.
If things are going well and they can keep rolling without further funding…why take it?
I have been offered VC funding as well for TribeBoost. But we do not need the money.
We are profitable, growing every month, and have enough funding to fuel our growth, development, and advertising/marketing.
Kevin is right……depends on whether you need the money. But, there is something to be said about making your fortune by hitting several singles rather than one big home run. Also remember the famous line by Bernard Baruch……”I made my money by selling too soon.” Nice to have some money in the bank. Gives you much more independence on subsequent deals you get involved with.
My advice would be to interview several m&a firms with experience in their industry category and get the firm’s insight on expected outcome, timing this will take and the things that need to be accomplished. Many times angel and VC valuations exceed the current market reality so it is important to get clarity on the real potential if a $25mm exit. Plus, can the deal be done for all cash or does the $25mm include ear outs which many acquirers will want to include from an early stage deal. This changes the economics significantly. Or, could earn outs allow for the deal value to go above $25mm if targets are achieved? It’s kind of like selling a house. It helps to understand what this exit process, value, etc looks like from the professionals before making this critical decision. Last ket advice is you don’t want to be running on fumes when it comes time to get a deal done as a sine savvy acquirerers will unfortunately take advantage of this position of weakness. My gut is that valuations are at an all time high and take it before getting VCs involved, invest the 2-3 years in the sale, transition, and this will set the team up for life. Remember pigs get slaughtered.
I’d agree with Dave. I met an entrepreneur a few months ago who was just about to IPO the month of 9/11. Life-changing event and one-in-a-lifetime opportunity lost. Thiel was another story but he was macro-savvy enough to get out right before, barely. David was fortunate to start right in the wake of the financial crisis and have a nice long run to extract the best possible valuation but as an entrepreneur right now I’d be looking to take profits. One must also remember VCs can be far less friendly when liquidity starts drying up. The biotech sector e.g. Theranos is worst hit at the moment thanks to VRX but this sentiment could spread.