
Beginner's Guide to Cap-Table Dilution: Cloudera's $1B Fundraise - reesdreesd
http://thedavidrees.blogspot.com/2015/03/the-beginners-guide-to-cap-table_29.html
======
paulsutter
Biggest omission is the option pool. The option pool is expressed as a
percentage of the post money shares, and can range from 20-40%.

A 30% option pool would make the founders stake 50% after the hypothetical
series A, not 80%.

Not to mention any seed investors, whose stake would also be deducted from the
hypothetical founders stake in the series A. And by the time of a Series F',
there has usually been additional dilution from expansion of the options pool,
warrants issued for venture debt, etc.

If you're wondering, why is the options pool included in the pre-money
valuation, when those shares haven't even been issued yet? VCs probably
started this practice to make their offer seem more impressive. I'd love to
hear any other explanations, it's a curious phenomenon.

EDIT: While its true that option pools have gotten smaller recently, that does
mean the pool needs to get expanded again more and sooner, certainly by a
series F'.

~~~
tzm
Great point. But, 20-40%? I haven't seen this (yet). Option pools have been
10-20%, with most being 15%. Perhaps I'm a fish out of water.

~~~
erichurkman
No, you're not out of water on that. 20 - 40% is way out of bounds, even on
very large VC-backed companies.

15% is a good median. Some do go higher but use the option pool to issue
portions of the founders' equity, but that's rare.

------
CPLX
This analysis is dubious. The main problem I see just eyeballing the numbers
is that the ratio of the funds raised in each round to the post-money
valuation averages around 1:6 to 1:8. Or said another way, the investors in
each of the rounds are buying around 12%-18% of the company during the round.

I'm not an up to the minute expert so maybe this is the new normal, but in my
experience, those ratios are usually more like 1:3 or 1:4. It's pretty normal
for VC's to own 30-35% of the company after a Series A.

Very hot and high growth companies (Facebook, famously) have been able to sell
off single digit percentages of the company with incredibly high valuation
increases between rounds. But those results may not be typical.

~~~
mathattack
The general premise still holds though - As long as the pre-money in a round
exceeds the post-money in the prior one, the owners are worth more. The
analysis is over-simplified, but it still explains the situation clearly.

As for how much is given away... I think Cloudera is a special company. Most
of the unicorns are. The same strength ("We can wait on the money") that gets
them to a billion is also what allows them to get away with less dilution.

~~~
hisabness
your analysis is flawed. it really depends on the valuation at which each
round is raised.

~~~
mathattack
Of course. But it's post in one versus pre in the following. If the post-money
valuation grows from 50 to 60 million after taking in 20mm in new money, the
founders get diluted. If it grows from 50 to 60 with 5mm in new money, they
don't.

------
elsewhen
i think the article should at least mention the liquidation preferences of the
VC investors. for example, if the if the company sells for less than the $1B
amount raised, the founders would likely end up with zero (assuming that the
investments were made with a 1x liquidation preference).

~~~
boomzilla
That's right. Does any know what's the standard participating and liquidation
preferences these days? I know first hand a technical founder who made almost
nothing from a >100M exit because the investors got 2x the money they put in
first, before the rest is distributed to the common stock holders.

~~~
elsewhen
1x liquidation preferences are the standard in tech investments these days.

------
greghendershott
Another way to feel better about dilution is to realize that the valuation
after every round is a mutually agreed abstraction. Until some actual
liquidity event puts cash in hand, you have valuation not value.

The only meaningful dilution is the one where the founders become minority
shareholders. Although loss of control isn't necessarily bad and can
eventually pay off, unlike valuation it is not abstract, it's tangible.

~~~
serve_yay
> Another way to feel better about dilution is to realize that the valuation
> after every round is a mutually agreed abstraction. Until some actual
> liquidity event puts cash in hand, you have valuation not value.

Yeah, but your ownership stake tells you how much of the value is yours. So it
kinda doesn't matter that valuations are hypothetical -- 75% of $any amount is
less than 50% of that amount.

------
exelius
The rule of thumb with dilution is that you probably shouldn't worry about it
too much unless you have to take a down round. That's when your investors'
anti-dilution clauses will kick in and eat away at the founder/employee pool
(their dilution protection comes at your expense).

------
the_watcher
The primary takeaway here, to me, is to remember that when fundraising, the
goal is to increase the size of the pie, and that 1% of 1 billion is
substantially more raw value than 100% of 5 million.

------
rokhayakebe
More helpful data would be 1) How many founders end up raising $1B and 2) how
much equity each ended up with. Let's use historical data to support 28% after
x rounds.

~~~
philrapo
Here's an infographic showing ownership in Box as they IPO'ed.
[https://equityzen.com/blog/box-path-to-ipo/](https://equityzen.com/blog/box-
path-to-ipo/)

------
forrestthewoods
Holding own to 28% after 7 rounds seems... optimistic?

