Continuing with yesterday’s post titled Dilution With Every Round of Financing, it’s instructive to walk through an example as a founder. Before the example, I like to highlight the stories of ultra-successful entrepreneurs that have taken their company public, and the vast majority own less than 20% of the equity at time of IPO (e.g. Marketo’s founder had 6.6% and Cvent’s founder had 16%) . Now, 20% of $500 million is still a massive number, but it’s a far cry from what people might otherwise think the entrepreneur owns.
Here’s an example walkthrough of dilution over several rounds of raising money:
- Two entrepreneurs come together and start a company, splitting the equity in half (so, each has 50% of the equity)
- Angel investors are excited about the working product and early customers, deciding to invest $300,000 for 20% of the business (the entrepreneur now owns 40%)
- Recruiting great…
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