After reading the Notes from the Atlassian S-1 IPO Filing again, there’s one element that truly stands out for the proposed $3 billion company IPO: the two founders own 75% of the company. That’s simply unheard of for venture backed startups. Atlassian has been incredibly capital efficient and only sold a relatively small percentage of equity when they raised money. When raising money, there’s no set percentage that venture capitalists purchase, but it’s generally 15-35% of the company each round of financing.
Let’s look at the difference of three rounds of financing selling 15% of the company each round vs selling 35% of the company each round.
Selling 15% per round and assume no pro-rata and no extra dilution from new stock option pools:
- Series A – Investors own 15%
- Series B – New investors own 15% plus existing investors own 12.75% = 27.75%
- Series C – New investors own 15% plus existing investors own 23.6% = 38.6%
Selling 35% per round and assume no pro-rata and no extra dilution from new stock option pools:
- Series A – Investors own 35%
- Series B – New investors own 35% plus existing investors own 22.75% = 57.75%
- Series C – New investors own 35% plus existing investors own 37.5% = 72.5%
So, a startup with three rounds of low dilution owns 34% more of the company vs a startup with three rounds of high dilution. While there’s intense focus on the amount of money startups raise, there’s much less discussion about what percentage of equity was sold to raise that money.
Entrepreneurs would do well to place more consideration on percentage of the company they sell to investors, especially in the context of raising multiple rounds of financing.
What else? What are some more thoughts on high and low equity dilution scenarios?