Something for founders to think about when they're taking funding. If you look at the gigantic tech fortunes - Gates, Page/Brin, Omidyar, Bezos, Zuckerburg, Hewlett/Packard - they usually came from having a company that was already profitable or was already well down the hockey-stick user growth curve and had a clear path to monetization by the time they sought investment. Companies that fight tooth & nail for customers and need lots of outside capital to do it usually have much worse financial outcomes.
So investors are willing to give founders significant liquidity so they are comfortable (or locked in to) "going all the way" (snapchat comes to mind ).
Remember, investors need billion dollar returns to return a fund. So giving founders a few million to pad their pockets, reduce their own risk, and extend their companies timeline is occasionally a simple decision.
It is. It used to be seen as a sign of lack of confidence in your company that you would take money out, because if you believed that your company was heading for the moon you would want every share possible. BTW, the same was true for earlier investors: Non participation was the kiss of death.
FD: Info from about 10 years ago.
It's obvious that founders prefer to keep more of the company, however tortured of a phrase you use to express it.
I think the overall point is not to never take outside investment, it's to carefully consider where you are in your product's lifecycle and what your market actually looks like before you take outside money. Refusing VC money if your market is huge means that someone else will take it and eat the whole market. Taking VC money when your market is small will kill your company just the same, because you won't be free to make the trade-offs necessary for a small company to succeed in a niche market.
edit to add: This is an interesting equation though,
> 75% of a $40M acquisition = 3% of a $1B acquisition.
In a strict sense yes, but they differ in some interesting ways. In favor of the $1B acquisition is that it's typically a much bigger deal: in terms of PR and what you're credited for, you get a lot more of it for being the founder of a $1B company than for founding a $40M company, even if your takeaway is the same in both cases. On the other hand, in the 75%-of-$40M case you are usually in a better position to control the disposition of the company, which may be important if you care about it & its product, and want to keep working on it (whereas in the 3%-of-$1B case, you generally will have to be satisfied with the cash, and wash your hands of the company). And the $40M case also probably has better odds of success.
However, they could kill it at enterprise and introduce some game changing product or service,
i.e. Zuck has majority control over Facebook: http://blogs.wsj.com/deals/2012/02/01/at-facebook-governance...
Prior to the completion of this offering, we had two classes of common stock...identical except with respect to voting...
Upon the completion of this offering...All currently outstanding shares of our Existing Class A common stock, Existing Class B common stock and redeemable convertible preferred stock (including shares to be issued upon the exercise of the Net Exercise Warrant immediately prior to the completion of this offering) will convert into shares of our new Class B common stock.
After the offering there will only be one type of shares, not two as at Facebook.