

Paths to $5M for a startup founder - icey
http://www.gabrielweinberg.com/blog/2010/06/paths-to-5m-for-a-startup-founder.html

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staunch
Two co-founders that give up a total of 15% - 25% to raise $500k - $1M
(ideally from well known investors) and never take another dime of investment.
That seems like the best balance all things considered.

Your odds of success are much higher, and your opportunity to exit (if you
want to) at a low price is still there.

1) You can still accept a relatively low acquisition price.

2) Your share is still 37% - 43%, which is a huge chunk.

3) You have investors that will help with acquisition
offers/hiring/partnerships, etc.

4) You can afford to pay for things that significantly accelerate your growth,
that you would otherwise shy away from.

5) You're instantly full time (compared with a day job, or consulting work on
the side).

6) Other companies/people will take you more seriously because you have
investors.

~~~
dasil003
Yeah that sounds good. However I think there are a lot of ideas where a solo
engineer could hack out a prototype over 6-12 months and significantly
increase the pre-investment value of the company. I guess it depends on the
type of product and the hacker's skillset.

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axiom
As much as it's fun to think about how much you personally stand to gain in an
exit, it's all just pie in the sky silliness. Your number one goal should be
to maximize your odds of success without constraining yourself to any
arbitrary parameter like "no more than 2 cofounders."

Building a profitable company is such a difficult and volatile process that if
you try and focus on anything other than just success (e.g. your personal
take) you're going to end up shooting yourself in the foot and end up with
nothing.

~~~
epi0Bauqu
On the contrary, there are many concrete decision points where this logic
should come into play--dispelling your logic was exactly the point of the
post. In particular:

\--whether to go it alone for a while at the beginning and see if you can make
something happen

\--whether to bring on more than one co-founder; this may seem like a no-
brainier, but I've seen plenty of startups with 3, 4 and even 5 initial
founders.

\--how much to raise in the first round of financing, which directly
correlates to dilution

\--what to do with the first round of financing, which directly correlates
into whether you will need a second round and how much

\--how much control to give up in terms of whether small exits are still on or
off the table

I wasn't saying you should constrain yourself at all costs. I was saying you
should really look hard at the potential personal financial outcomes that flow
from these decisions.

~~~
axiom
Just so it's clear what I'm trying to say: when you're trying to decide
whether to do x or to do y, you should always chose the one that maximizes the
odds your company will succeed (whether that means exiting or becoming
profitable...) So for example if you're thinking of bringing on another
cofounder, quite frankly worrying about dilution is absurd - about 10x more
important is whether this person is the right fit, and whether they will
increase the chance that your company ends up on the right side of the 1/10
success ratio for startups.

Let me put it another way: startup success is largely a black swan event, so
what you should be worrying about over and above everything else is your
exposure to that highly improbably event, rather than the particular kind of
black swan event you're hoping to get.

~~~
epi0Bauqu
_startup success is largely a black swan event_

I don't think that is true at all, which is probably the core of our
differences. Black swan implies a very low probability like 1% or less. On the
contrary, I think that when approached well, the probability for startup
success is much higher, like 10-40% depending on what you mean by success. I
wrote up some of these thoughts at <http://ye.gg/failure> &
<http://ye.gg/success>

More practically, consider the co-founder example. Worrying about dilution is
not absurd because you have so many choices that may have equal outcomes for
the success of your startup. For example, you can do a 50/50 split or you
could hire a consultant for a specific aspect you need help with or you could
do an 80/20 split like I mentioned in the post. All of those scenarios can be
with the _same person_ you have in mind, i.e. with all other things held
constant. That's the point. People, especially first time entrepreneurs,
reflexively pick up co-founders or reflexively go seek financing before they
consider their other options.

~~~
webwright
Just to share some industry perspective here, I heard that fewer than 15% of
venture backed startups are still operating after 3 years (source:
<http://twitter.com/dharmesh/status/14067731416> <\-- HBR hearsay). Presumably
a significant majority of the survivors will never see a founder-meaningful
exit and are in the "walking dead" category (as VCs call it).

Even if 1 in 3 see a meaningful exit, that puts us at a 5% win rate (I'm
guessing it's more like 1 in 5).

I don't know if you'd disagree, but I'd say that venture-backed startups have
a better shot at meaningful liquidity than their bootstrapped kin (given how
many people have a vested interest in it and given that VC is a quality filter
to SOME degree).

Anyhoo, all that tells me that 1% is a heckuva lot more correct than 10-40%
(running the numbers).

I'm with the parent of your comment-- whenever you have the chance to nudge
that 1% northward, you should take it.

~~~
epi0Bauqu
The difference here is my _when approached well_ language. When good angel
investors report their #s, e.g. Brad Feld, Fred Wilson, etc. they say roughly
1/3 return nothing, 1/3 return something and 1/3 are successful to some
degree. That's the 10-40% I'm talking about.

If you take the universe of all entrepreneurs, then yeah, it's super small,
and looks like a black swan event from the outside. But that's sort of the
point of the black swan theory--in the right context the black swan isn't
nearly as rare. The context I'm talking about is entrepreneurs who are
approaching it well. I know that is nebulous and I'm not defining it well, but
roughly the type of people those really early stage angel investors would
invest in.

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brk
Interesting article, and I think part of the underlying point is that you
might be better off building a smaller, less complex company if your primary
goal is just to get to some (relatively small) exit.

It doesn't address the Equity Equation though. In theory you should be
assigning shares based on some roughly calculated guess as to how much
additional value those other employees (or founders) will bring.

Sure, if you can do it all yourself there is no need or reason for massive
dilution by handing out shares to other people. But the reality is that you
often have the "technical" founder and the "business" founder. In the majority
of cases they are both worthless without their combined talents and
contributions.

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garply
Interesting that all the paths involve selling the company. What about
generating $5M for yourself through sales of the company's products instead of
a sale of the company itself?

~~~
replicatorblog
The 37 Signals approach is a good one, but one thing they ignore is that there
are opportunities to make money in fast moving/growing areas that may not be
the founder's true passion, in a short time period. 37S decries this as
lottery thinking, but the odds are better, the process is repeatable, and
methods are trainable. Gabriel happens to be in that part of the ecosystem and
it is where his expertise lies.

~~~
dhh
The odds of making a $17-50MM exit is higher than what? Turning a $1M/yr
profit over 5 years? I think not. If the process was so "repeatable and the
methods so trainable", the world would be flush with quick flip, sell-out
millionaires. It is not. It is however full of people who became comfortably
rich building up a profitable business.

~~~
replicatorblog
I was trying to articulate the odds of "flipping" a startup are greater than
those of winning the lottery which is your oft stated comparison.

You guys are all about boot strapping and you provide an awesome contra view
to the conventional wisdom. That said, I know a great many more people who
have sold web businesses and never have to work again than those who are
reaping millions in profits via the same. Honestly, I'm amazed at how many
people I meet who are financially set based on some obscure web business they
sold to a non-traditional acquirer. I'm not even that plugged into the startup
community and I've met a couple dozen folks easily. Heck, among YC alums alone
I bet you would find a bunch, even the under publicized ones.

Are the odds long? sure. Are you more likely to become wealthy spending a few
post college years doing a funded startup rather than working at Google? Hell
yes.

I really liked Rework, and like the "Profitable and Proud" series, but there
are opportunities for people to fill small product niches and "sell out"
quickly. Especially in unsexy categories like analytics and other B2B
applications.

You might find it distasteful, but I'm sure a moderately well connected VC or
angel could match every company in your P&P series with a series called "This
company sold for XX millions and you never heard of them once."

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webwright
Love the post, though the dilution #s seem whacky to me (my experience is
somewhat limited).

First, it seems like an odd assumption that you'll be doing 3-4 rounds of
financing before you exit. I've no idea to what degree that's the norm, but
the founders I've known who've seen exits, very few had done a B round, much
less a C or D. Certainly, companies who do C and D rounds tend to exit for
MUCH higher sums than $30-50m.

Gabriel, you saw an exit. At the time, did YOU own 30% of the company? I
assume not. do you think 30% is the a normal number for founders to share at
an exit? I don't-- but again, my experience is limited.

~~~
epi0Bauqu
In my case, the founders owned 100% of the company--we never had any external
investment or employees.

Just to clarify, I was only suggesting further rounds (beyond A) for when
you're really swinging for the fences, i.e. gunning for an IPO or a really
really big exit.

As for the dilution numbers, 30% is accurate if you raise a series A. For some
data check out
[http://www.wsgr.com/publications/PDFSearch/entreport/Winter2...](http://www.wsgr.com/publications/PDFSearch/entreport/Winter2008/private-
company-financing-trends.htm) and scroll down to the graphs.

To quote a friend, "In an A round, VCs typically do an 'n on n' investment,
e.g. $3M on a $3M pre-money, or $4M on $4M, or 5 on 5." That means they're
taking 50%. Then you add in the option pool. You could get less if you have a
lot of traction, but to get there you probably raised an angel round that had
dilution, so you're about at the same place.

Play around with <http://www.ownyourventure.com/equitySim.html> to see the
possibilities.

~~~
webwright
I don't think those charts support your numbers (they show a median of $3m
raised on $6m pre... $9m post-money, 33% sold). The idea that founders
collectively own 30% of the company after a Series A is pretty wrong in my
experience (I've raised a Series A and have lots of friends who have as well--
inside and outside of the "YC Mafia").

If I ever had a friend tell me they had a term sheet for $3m on a $3m pre-
money valuation, I'd tell them they were either lacking leverage or that
someone was trying to take advantage of them.

~~~
epi0Bauqu
I'll see if I can dig up some better #s. But a few comments...

\--to get that leverage you usually have to meet some milestones (get some
traction), and that is usually done from a seed round where you already gave
up some dilution. I think it can be increasingly done via YC (6%) or even by
one-self, but there are still certainly a lot of seed -> series A

\--the eventual dilution # also includes the option pool (another 20%). Like I
said in the post, not all of this may be allocated at the time of acquisition,
but it may be and it does sit out there on the cap table.

\--I assume you and your friends have raised from relatively well-known top
tier VCs. There are tons of VC firms we've never heard of, so when you look
across everything I think the #s may look different. WSGR is of course seeing
top-tier deals.

\--This is mainly for first time entrepreneurs, who for many reasons are often
in a position of less leverage. Of course, as I said traction trumps
everything, so I think you should go for that first. It's the quickest path to
exit and the least dilution.

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christonog
I'm curious as to why you chose $5M and not another number like $3M or $2M? Is
that the (gross) magic number to change your life financially?

Edit: fixed typo.

~~~
aditya
Yeah, with $5M in the bank you can live off the interest "forever" - ideally
you'd spread the risk and stuff but with anything less than that amount it's
hard to call yourself financially independent...

~~~
boucher
Of course, a $5 million exit is not $5 million in the bank. Depending on where
you live, and a lot of other factors about the sale, it could mean as little
as <$3 million after taxes (avg. case probably being around $4 million).

~~~
vicaya
I'd assume all founders would know about 83b election (us founders anyway.) to
cap the tax rate at 15% (long term capital gain)

~~~
rdl
By 15% you actually now (as of next year) mean 20% + 3.8% + (state tax, such
as California's 10.3%)

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simonreed
What I don't like in discussions like this is that people are looking for a
binary answer to a problem that clearly has no this type of solution (it
actually may be sensible to start up alone but it depends on personal
situation of the person with the initial idea...).

The issue is made even worse by those who 'have already done it'. We hear this
all the time: you have to do A, C and F but never M to achieve Z.

Finally, I've always thought that delicious.com was started by one guy working
part-time and only when there was some traction there was another guy taken on
board. Am I correct?

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schoudha
As soon as you start doing calculations like this to determine how many co-
founders you should have it's almost a guaranteed you're not going to be
successful.

Build something people want with people you love to work with. The rest will
work itself out.

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thafman
I tend to think of these steps as analogous to lifelines in "Who Wants to Be a
Millionaire"; some people can make it to the million with no help, some need
lifelines and just others cash out (not to mention those unfortunate souls who
guess wrongly).

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yosho
Yes, the odds of a single founder exiting for 10M is greater than 3 founders
exiting for 100M, however, the article fails to take into account the odds of
a single founder start-up being profitable vs a multi-founder start-up being
profitable. I believe the second case is much more likely due to the sharing
of responsibilities, overlapping skill sets and the ability to bounce ideas
off one another.

There's always going to be a trade-off, things aren't so black and white.

~~~
jimboyoungblood
Since when does one need to be profitable in order to exit? :)

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maccman
One other thing is that Tax man takes ~25% (capital gains)

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vicaya
That's why it's important to know about 83b election to cap the tax rate at
15%. Any start-up lawyer/law firm worth its salt would do this for you as part
of the pile of forms to sign when you incorporate.

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sthomps
great post

