Is a Small Piece of a Big Pie Worth Much?
When a venture capitalist is speaking to a first-time entrepreneur and valuation comes up, almost without fail, the VC will tell you, “A small piece of a big pie is better than a large piece of a small pie.”
Usually the conversation stops there. Apparently the compelling logic doesn’t require explanation. This week, we’re going to put some numbers around that statement, and you can decide for yourself if it’s meaningful or not.
When a company is first launched, the founders own 100% of the company.
Company Valuation ?
Founders’ Ownership 100.00%
Founders’ Value ?
Attracting an initial, seed round of investment can be a mixed blessing for you. On the one had, you’re ecstatic that you’ve attracted investment and can now pursue your dream with vigor. But on the other, you’re in shock over how much of your company you’ve had to sell to get it. You sure hope that this concept of a smaller piece of a bigger pie works for you!
Company Valuation $2,000,000
Founders’ Ownership 30.00%
Founders’ Value $600,000
Well, things have gone well. You’ve been able to attract an investment from a venture capital firm at a step up in value. Your share of the company has gone down again, but not to the degree you suffered with the seed round. While still concerned about the “smaller piece” issues, your paper value is moving in the right direction.
Company Valuation $10,000,000
Founders’ Ownership 11.25%
Founders’ Value $1,125,000
Damn, you’re good! Things continue to progress according to plan and a big league, first-class, well known and highly regarded venture capitalist has made a significant investment into your company, again at a step up in valuation! And the VC is only investing because they think that they can get at least a five times multiple on their investment. If things go well, next step is an IPO!
Company Valuation $30,000,000
Founders’ Ownership 7.27%
Founders’ Value $2,179,688
Halleluiah! You’ve gone public, just like you had hoped you would all those years ago when your seed investors convinced you that a smaller piece of a bigger pie was what you had to work for!
Guess what? They were right!
Company Valuation $187,500,000
Founders’ Ownership 5.81%
Founders’ Value $10,898,438