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Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html http

Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html Edit: mentioned in the article - I should read more carefully!

natejenkins 13y ago
'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.' Can someone explain to me how this makes sense. I'm still going to have to give away x percent of the company to raise another $3mm. What am I missing here?
- johnrob 13y ago
  I agree, that didn't make much sense. It seems like the post was targeted more towards LPs than startups.
- ScottBurson 13y ago
  "... at an even higher price" is perhaps unclear; I presume he meant "... at an even higher valuation". That is, the total percentage of the stock you have to sell to the investor to raise the money is less if you raise in two stages than if you get it all up front. There's an assumption here: that you actually manage to make demonstrable progress in the business between the first and second round. If you think it's going to take longer to show progress than the amount of time $2M will give you, then you should raise more to start with.
- jfarmer 13y ago
  He's speaking as a buyer of equity. Later, equity will be worth more (i.e., have a higher price) so that same $3MM will be less dilutive. Conversely, from the entrepreneur's perspective, that same $3MM will be "cheaper" in the future. Depending on the math, you could easily wind up with the same amount of cash raised but less dilution overall.

natejenkins 13y ago

'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.' Can someone explain to me how this makes sense. I'm still going to have to give away x percent of the company to raise another $3mm. What am I missing here?

johnrob 13y ago
I agree, that didn't make much sense. It seems like the post was targeted more towards LPs than startups.
ScottBurson 13y ago
"... at an even higher price" is perhaps unclear; I presume he meant "... at an even higher valuation". That is, the total percentage of the stock you have to sell to the investor to raise the money is less if you raise in two stages than if you get it all up front. There's an assumption here: that you actually manage to make demonstrable progress in the business between the first and second round. If you think it's going to take longer to show progress than the amount of time $2M will give you, then you should raise more to start with.
jfarmer 13y ago
He's speaking as a buyer of equity. Later, equity will be worth more (i.e., have a higher price) so that same $3MM will be less dilutive. Conversely, from the entrepreneur's perspective, that same $3MM will be "cheaper" in the future. Depending on the math, you could easily wind up with the same amount of cash raised but less dilution overall.