Exit Economics
There is a fun question that shows up on social media from time to time. It goes like this: “Would you rather own 100% of a $100 Million company or 10% of a $1 Billion company?” Lots to unpack here about founder exit economics, but let’s start at the beginning. When you create a new company, by default you own 100% of it. That is easy enough, right? If you bring in one or more Co-Founders, you will likely be giving them substantial equity at the outset. Possibly your personal ownership will drop to somewhere between 40–70%. Think long and hard before you do this with your co-founders. Will they be there for the entire 10+ year journey with you? Are you sure they will be able to grow into the leadership roles you are giving them as the business scales? Even if you don’t have any Co-Founders at launch, most leaders will want to have equity to share with key employees and advisors. Either way, let’s assume at inception you probably own a solid majority of the company, something like 75%.
Now it is time to raise a little early stake cash to get the business off the ground. Most idea-stage startups are going to need a hundred thousand bucks or more to get rolling. If you are not able to put this money in yourself, then you will need to raise it from friends and family. This is not a VC round, this is people that know you already and are believers. The valuation on this raise is going to be low, typically $1–2MM cap on a convertible note. Let’s say you need something like $150K and can raise from F&F at $1.5MM valuation, so you just gave up another 10% of the company. One key note, this is 10% of everyone’s shares, not 10% of only your shares. As a result, your shared drop 7.5% to around 67%.
Good news, you’ve had some success in the first year, and the business is showing some promise. It is time to raise a round of venture or angel money to make some key hires and start acquiring more customers. A typical Seed raise might be in the ballpark of $1.5MM on $7.5MM valuation. Oh no, this just diluted your ownership by about 20% down to something like 53%. Hey, that’s not so bad. You still own about half of a company “worth” around $7.5MM. Pretty solid for a year or two of work to get to this stage.
Going forward, let’s say you do another 4–7 capital raises over the next 3–5 years at increasingly higher valuations on your way to unicorn status. Maybe $25MM, then $100MM, then $250MM, then $500MM, then $1Bn. In that case, assuming dilutions of around 20% per round, your 50% ownership is going to end up somewhere in the 10–20% area. Pretty amazing right. You now own at least a 10% stake in a business valued at $1Bn. If you sell the business now or take it public, your founder shares are going to be worth over $100MM. If you had a 50/50 Co-Founder, then this number might be halved, but it’s still life changing money for each of you.
Please understand that lots of things can change this math. You might bring in key people along the way that meaningfully dilute your personal stake. You might have a Co-Founder blow out of the business and need to give new equity to their replacement. You might have a bunch of advisors or brand ambassadors that eat into the equity left for you. More importantly, your business might not follow this nice valuation progression. You might have more raises at smaller price increases which could quickly cut your ownership to the 5% area. Or things might go amazing for you and you might skip rounds by funding growth with customer cash, keeping your personal stake higher. Hey, it does happen.
So coming back to the opening question, would you rather own 100% of a $100 Million company or 10% of a $1 Billion company? In the first scenario you have to be talking about a business that is able to fully bootstrap to $100MM valuation scale without anyone else’s money and no Co-Founders or significant equity owning employees. The great thing about this first business is that you are 100% your own boss. You own all the equity, so no one can tell you how to run your business. However, for me personally I like the second business better. While you pocket the same $100MM, other people have made $900MM. You have created a lot of value for your employees and investors. You have also likely had a much bigger impact for your customers if the business is valued at 10X the first example. I like that idea a whole lot. The second business is going to bring a lot of challenges, with outside investors needing to be found and dealt with along the way, but that sounds like a really fun journey to me. If it is not your cup of tea, then venture capital cash is probably not right for you and your business.
Thanks for reading today’s post, I hope this helps you think about what kind of business you want to build and how you will finance it.
