Pittsburgh Ventures

I put out the request for questions two days ago, and quickly got a handful that I will be responding to over the course of the next week.  Please keep them coming!

The first question  is from Paul Merrill on Twitter:  ”dpaulmerrill: @aveeck is there anyway a founder can actually keep controlling interest in his comp when dealing with venture $ ?”

The simple answer is YES – not only is there any way, there are actually many ways.  As with most things the simple answer isn’t the whole answer, but I will keep this post simple and dive deeper as others ask me to go there.

Generally, most venture capital (VC) firms are not looking to take a controlling stake in the businesses they invest in, because it is the entrepreneur whom we are counting on to really grow their business.  As VCs, we want to make sure the founders have a HUGE incentive to make their company as big as it can be, and we usually accomplish this by making sure the founding team continues to have a significant stake in the company.

As an example, take the recent funding of Twitter that has been in the news recently.  They raised $200M from Kleiner Perkins, at a $3.7B valuation.  That means KP owns just over 5%.  Twitter has raised about $360M total over several rounds, and here are guesses at those previous rounds and how much of the company they sold in each instance (see them here on CrunchBase):

Series A: $5M on $25M valuation = 20%

Series B: $15M on $95M valuation = ~16%

Series C: $35M on $250M valuation = 14%

Series D: $100M on $1B valuation = 10%

Series E: $200M on $3.7B valuation = ~5%

Assuming founders started with 100%, and created an initial option pool of 10%, they owned ~70% after the first round of capital raised and ~45% after the latest round of capital, and are likely the largest shareholders as a block, by far.  These numbers can be off in both directions – I would assume that the founders have been “optioned-up” after at least a couple rounds to reward them for good performance and cover the dilution that comes from so many rounds of fund raising; likewise, I would  assume that they have had to increase their option pool at each round so that they have options to give to new employees.

At Meakem Becker, we don’t have a controlling stake in any of the companies we have invested in (except for one that we founded ourselves).

But money and share ownership isn’t the only way control is determined.  There are a few items that venture capital firms do like to have greater control over.  Typically, we will ask for terms in the deal that give us special rights – such as first priority to get our money out of the business, and special veto rights on the board of directors, to name just a couple.  Fred Wilson has written about his “three things he would never invest without”; they are all about degrees of control.  There is a movement to codify and simplify what and how many of these terms exist, especially on first round term sheets.

The best way to assure controlling interest in a company you founded is to:

1) Take the right amounts of money at the right time.

2) Create value in your business that outside investors believe in – user growth, product development, or customer/revenue growth.

3) Work with the right capital partners that are reasonable about non-cash terms in their agreements with you.

Thanks for your question, Paul.

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• Ask a VC: “We Probably Would Have Been the Last Guys to Do a Round in Twitter” (TCTV) (techcrunch.com)