Understanding How Dilution Affects You At A Startup. Editor’s Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at his Startup Blog, BothSidesoftheTable. Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up. The simplest way to think about this is: If you own 20% of a $2 million company your stake is worth $400,000. If you raise a new round of venture capital (say $2.5 million at a $7.5 million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). So you own 15% of the new company but that 15% is now worth $1.5 million or a gain of $1.1 million.
But understanding how you’re likely to get diluted over time is a more difficult concept. And Jess is awesome at his trade. 5 Mistakes You Can’t Afford to Make with Stock Options. Disclaimer: I am not a lawyer or tax attorney. Please consult with one before making any financial decisions as to what to do or not do with your options. Stock options are complicated; the paperwork that accompanies them can sometimes be a full inch thick of financial legalese. Most employees are just glad to get some ownership in the company — and maybe a lottery ticket if the startup does really well. But most employees don’t recognize what their options really are, nor do they understand that there are some catastrophic choices they can make with those options that could leave them bankrupt or worse.
For the executive summary: If you can afford it, forward-exercise 100 percent of your options the week you join a startup and file an 83(b) election immediately. Here are five common mistakes employees make, as well as why they spell bad news. 1. Many employees join a startup and work incredibly hard at a sub-market salary for years in the hopes of “striking gold.” Not so fast. 2. 3. 4. Seed Stage Valuation Guide « Jordan Cooper's Blog: startups, venture capital, Hyperpublic. Posted on January 12, 2011. Filed under: startups, venture capital | I find it strange that with all the VC and Angel blogs out there, nobody seems to explicitly talk about the single most interesting term in startup financing: Valuation. Look no further than Chris Dixon’s blog for elucidation on such nuanced terms as founder vesting, convertible notes with caps, etc…but where do you go to find out how much you should expect to give up at various stages in your company’s development.
In the past week alone, I’ve regrettably passed on more than one deal because the valuation the founder was seeking was an order of magnitude off from what was appropriate, and frankly I am pissed. I am pissed that the earliest “committers” to these rounds aren’t advising founders that they are pricing their rounds incorrectly. Notice I am not saying I am pissed that the early committers aren’t doing a better job of negotiating. DISCLAIMER: this may vary by geography and past experience of founding team. Amazon.