Author: David Cummings

In light of the flurry of VC-backed technology company IPO filings this year, one of the more interesting data points was the beneficial equity ownership of the co-founder(s) (e.g. what percentage of the business did they own).

Here are a few data points on founder equity ownership at time of IPO:

• ExactTarget co-founder – 3.8%
• Yelp co-founder – 11.1%
• Guidewire co-founders – 3.9% and 5.1%
• Bazaarvoice founder – 14.3%
• Eloqua co-founder – 5.5%
• Jive co-founders – 15.8% and 15.8%

Now this doesn’t take into account founders that cash out some of their equity prior to IPO, which isn’t common but is noted in the ExactTarget S-1 (~$5 million). But, it appears that on average for venture-backed companies that reach an IPO, founders typically have between 4% and 15% of the equity (note that Marc Benioff of salesforce.com had over 30% of the equity at the time of IPO: source).

What else? What are your thoughts on the percentage of ownership founders have at time of IPO?

An entrepreneur recently asked me for advice regarding the amount of equity to grant to a key hire. There’s a fair amount of information online with the following rough values for a Series A-stage company (the values can vary dramatically for a number of reasons):

• CEO – 5%
• C-level – 2%
• VP – 1%
• Director – .5%
• Manager – .25%
• Engineer/specialist – .1%

Percent ownership is only one piece of the equation, and is best viewed in the context of a number of factors like preferred stock preferences, strike price (assuming stock options), money raised, etc.

Instead of percent ownership, I prefer approaching it in the same manner as Fred Wilson. Here’s a quote from his post titled “Employee Equity: How Much?”

The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.

So, the next time you’re discussing equity with an employee, explain all the parameters but focus the conversation around dollar values and expected outcomes.

What else? What are your thoughts on determining equity grants for startup employees?

Early last week I was talking to an entrepreneur about startup valuations and how for the Series A round it really depends on the amount being raised. The idea is that VCs want to own roughly 1/3 of the business, so if you raise $3 million, your pre-money valuation will be $6 million. If you raise $4 million, your pre-money valuation will be $8 million. Some VCs want 40% of the equity so the pre-money valuation, assuming the same amount raised, will be slightly lower. The valuation is based on the amount being invested and the desired amount of ownership by the investor.

Now, once the startup starts generating revenues the valuation dynamic changes to more traditional metrics. Here are four quick factors in startup valuations:

• Profits/earnings – the amount of money the startup makes, typically before factors like taxes, interest, depreciation, and ammortization
• Growth rate – the faster revenues and profits are growing, the more valuable
• Recurring revenue – the greater the percentage of revenue that’s recurring, the more valuable
• Gross margins – the greater the gross margins, the more valuable

So, a company that is extremely profitable, growing fast, 100% recurring revenue, and high gross margins will be the most valuable, everything else being equal.

What else? What are some other factors in startup valuations?

Last week I was talking to a successful entrepreneur and he was updating me on great progress with his new venture. After talking for a bit about how my company is hiring a number of people and how hard it is to find the right people, he mentioned something that made me pause: he had a number of people from his previous business he couldn’t wait to hire as soon as his new business could afford them. With his non-solicitation agreement term limit about to expire, there was no negative recourse to bringing previous employees into his new venture.

A significant benefit for successful serial entrepreneurs is recruiting previous colleagues to a new venture.

This seems obvious in retrospect but hadn’t become apparent until I’d been in a situation where the amount of time and effort it took to find the right people was much more substantial than desired. Recruiting is hard work and to have a pool of trusted, known-quantity previous team members is a real benefit for serial entrepreneurs.

What else? In what other ways is recruiting previous colleagues a benefit for serial entrepreneurs?