

How much to keep of your startup? - elisabeth

I just listened to Sam Altmans &quot;How to Start a Startup&quot; lecture. One part that irritated me is that it is said that in the end you will probably keep around 10% of your startup.<p>Im building a startup right now that is suitable for hyper growth. I expect to keep the majority of it. From previous ventures, I have enough money to pay for myself for the forseeable future. And one or two team members if I find them. So far I do stuff on my own. Its a pure software startup. Why would I expect to sell 90% of it?<p>Zuckerberg owns 28% of Facebook.
Larry and Sergey own 18% of Google.<p>Any numbers on how much the AirBnB, Dropbox, Pinterest... founders kept?
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tptacek
The mismatch you have with Altman is that you're assuming you'll keep the
lion's share _of the founder equity_ (as distinct from employee and investor
equity). That being the case: with investors, you can plausibly hope to end up
with somewhere between 20-50% of the company.

Say that as a single-founder company, in the unlikely event that you manage to
raise not only a seed rounds but an institutional A round, you end up holding
40% of the company by the time it sells.

Now look at what happens if you have two equal co-founders: 13%, squarely in
Altman country.

Being irritated about this is pointless. At each dilutive step --- dividing
the pie between cofounders, allocating options to employees, buying a pile of
money from seed investors, buying a bigger pile of money from VCs --- you were
given a judgement call: "will the amount of equity I end up, converted to
dollars, be _higher_ or _lower_ if I give up equity now?" If the answer is
"no", you say "no".

Often the answer is "yes". For instance: "will I make more money in the long
run if I cut my stake _in half_ by bringing on an equal cofounder?" If you're
being careful, and you don't have a cofounder already, probably yes. Looking
at your percentage is not helpful. Think of it this way: prior to having a
cofounder, all your energy and skill is generating ${X} amount of value. If
you select a cofounder carefully, you can end up generating _more than ${2X}_
: not only is there _a whole other founder_ working on the problem, but their
skills complement yours. Also you can get the stomach flu for a week and not
leave the company rudderless.

The percentage you're left with is a barometer, but it's a little like the
spot cost of a share of stock: you need more context to actually evaluate it.
Having 90% of it can be a _bad sign_ : it means you're keeping a lot of your
value in the bank, rather than deploying it to accelerate your business.

You say you're building a company positioned for "hyper growth". I'd suggest
you double-check that assumption. Implied in the strategy of "hyper-growth" is
"fast go-to-market". That costs money. Money costs equity. My sense is that a
lot of people who believe they're in a shoot- the- moon startup are just fine
with 10%; 10% of ${BIG NUMBER} is ${BIG NUMBER}. If you're thinking about what
10% of ${MODEST NUMBER} is, you're not thinking about "hyper growth". Which is
fine! I think "hyper growth" is a bad strategy for most founders.

You can keep 100% of the company if you go it alone, don't take on investors,
and pay nosebleed market salaries for all your employees. Good luck. Just
remember what 100% of zero is.

Here's a link to one of the rare infographics that is actually helpful:

[http://tctechcrunch2011.files.wordpress.com/2011/10/dilution...](http://tctechcrunch2011.files.wordpress.com/2011/10/dilutionfinal02-640.jpg)

Here's Joel Spolsky on how equity divides in a well-run startup:

[https://gist.github.com/isaacsanders/1653078](https://gist.github.com/isaacsanders/1653078)

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gyardley
I might be wrong, but I doubt the cap tables for the startups you listed are
public. What the founders own is their own business.

Sam's likely talking about a 'typical' exit for a startup that's taken venture
capital - multiple funding rounds, reasonable valuations at each round.

If your startup is a Facebook or Google and does a lot better than the
'typical' startup that exits (which just by getting to an exit has _already_
done better than most), you can raise at better valuations and choose to sell
less equity. If your startup manages to grow in a capital-efficient manner,
you can also choose to sell less equity and keep more of it for yourself.

That said, being irritated with Sam is just shooting the messenger - he's not
lying to you. I certainly know of founders who came away with much, much less
than 10% of their company. That also isn't necessarily a bad thing, since the
stake they sold was used to get to an exit and expand their company. I'd
certainly rather have 1% of a mammoth exit than 100% of a failure.

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hkarthik
If you're hyper-growth, the needs of your startup will outgrow your team of
1-3 very quickly. You and your small team will get overwhelmed by either your
infrastructure (servers melting down under load), customer support, or user
acquisition costs.

The only way to keep up is to spend money addressing each of these areas.
Unfortunately, hyper growth startups are rarely hyper-revenue startups so the
money's gotta come from elsewhere. For at least a few years, you'll be
outspending any incoming revenue to keep the growth engine going.

If you want to keep more equity then the best choice is to focus on
sustainable growth. Take on customers only when you have the revenue to
support them and make sure you monetize your growth very early. This is a
perfectly acceptable strategy. Until a hyper-growth startup shows up as a
competitor and is willing to burn investor cash to move 10x faster than you
and doesn't need to worry about monetization strategies for a few years.

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brudgers
What matters is a controlling interest, not raw percentages.

Gates wound up with single percentage points of Microsoft. Around 2010, he and
Ballmer owned about 6% combined and were the two largest shareholders [ larger
than any of the massive S&P based mutual funds obligated to hold Microsoft
shares ]. This allowed them to control the company without worrying about Wall
Street because ousting Gates as Chairman or Ballmer as CEO required a
significant super-majority of voting shares ( ~56% plus 1).

For what it's worth, Gates and Ballmer also amassed more wealth than the three
tech founders you mentioned. In no small part because they took almost no
outside investment. This allowed them to maintain control over the timing of
the Microsoft IPO [ venture capital funds have lifetimes and thus there is a
pressure toward a liquidity event for any company which takes VC funds that
Gates and Balmer avoided ].

Good luck.

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elisabeth
Another example that comes to my mind is Markus Frind, owner of PlentyOfFish.
Did he every sell a part of it? I think he kept everything. And makes like 10
million a year. Not sure if that qualifies as "Hypergrowth". What do you guys
think?

~~~
hkarthik
Markus Frind was in the right place at the right time. When he launched
PlentyOfFish, most dating sites were subscription-based and he came up with an
ad-based revenue model. By being free for users when there were no
alternatives, he quickly got viral growth.

I'm not sure you could emulate his success today in wake of Tinder and other
free mobile dating apps that are venture funded and continue to grow at an
exponential rate.

