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Probably off-topic, but something I've never understood reading these things: How does this funding actually work? From what little I know (the stock market) y

by howeyc 13y ago

Probably off-topic, but something I've never understood reading these things: How does this funding actually work? From what little I know (the stock market) you'd sell an equity stake in your company for a certain amount and you have money in your personal bank account. But it sounds to me like all these funds somehow go back into the company?? how?? what am I missing?

benmccann 13y ago
The company issues new shares and the funds go into the company bank account. You own the same number of shares as before, but a lesser percentage.
deleted 13y ago
[deleted]
jfoutz 13y ago
That's sorta it, yeah. rather than the money going into your personal bank account, the company sells part of itself, and the money goes in the company's bank account.
JeffJenkins 13y ago
The really short version is that the company sells (probably newly created) shared in exchange for money. The owners of the company are generally not selling their own shares. That would lead to serious complexity. If you want to know more, read Venture Deals[1]. It's very thorough and well written. [1] http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist-ebook/dp/B00AO2PWOI/ http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
mattzito 13y ago
Okay, so yes, you are mechanically correct in that if you sold 10% of your shares for $1m, you would get the cash not the company. However, the way funding events work in real life is that new shares are created by the company and then sold to the investors. As a very math-simple example, I have 1m shares in my company, and I own 100% of them. Some VCs want to take a ~33% share of the company for $5m. My "board" (me) creates 500k new shares, and sells/gives them to the investors for $5m. Now there are a total of 1.5m shares, of which I own 1m, and the VCs own 500k. EDIT: sometimes, though, a founder will sell part of their shares to the VCs during a funding event. That's usually to help give the founder a little liquidity and cash.
- deleted 13y ago
  [deleted]
- draz 13y ago
  I think it's more typical to issue, for example, 10M shares, take 3M for yourself, and leave the rest for employees/VCs/whatever (rather than issue new ones, in a first round)
  - mattzito 13y ago
    Yeah, you're right, that's often the case, especially when you have cofounders and early employees that you don't want to dilute during the first funding round. However, I just wanted to keep the example simple, I thought it was easier to talk about creating shares than deal with the "who owns the unissued shares" notion. But yeah, that's a good clarification.
- howeyc 13y ago
  This answers my question, thank you. I had never thought of the company itself creating more shares, this is what I was missing in my thought process.
  - beachstartup 13y ago
    this is also how dilution happens - more shares are issued, and then everyone with existing shares owns a smaller % of the total amount. VCs everywhere will always prefer to work with their lawyers to make sure this goes in their favor. it pays to use your own lawyer so that all of this stuff happens on your own terms. lawyers are responsible to the party who pay their fees, so watch out if anyone seems overly generous with helping you out with legal bills.
draz 13y ago
I'm not sure I understand the question. What do you mean by "you have money in your personal bank account?" Are you saying that some of the money put in by a VC ends up in your personal bank account? If it does, it's through a salary you withdraw from the company. VCs, or any investor, will want X seats in your board, which will also give them a say about your salary. So if you got $1M in funding, no sane board will allow you to take a $700K salary. Your win from the investment is that now your company has money to move faster, by hiring more talented people, buy equipment that is important to the business, pay vendors, etc. In short, to scale. You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off. Your motivation, then, is to increase the value of the company so that % you have in the company will translate to more money in the cases I mentioned. After this long answer, I feel like I still haven't actually answered your question because you're probably asking about something more subtle :-)
- objclxt 13y ago
  > You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off If Evan Spiegel and Bobby Murphy weren't taking $10 million+ off the table during funding rounds they'd probably be far less likely to turn down a $3 billion offer. It is fairly common for founders to trade personal stock for cash during a funding round. Perhaps you mean during initial funding? It is absolutely possible - and common - for founders to take money of the table during secondary funding rounds.
chrisboesing 13y ago
Khan Academy has a nice 12 minute long video on this topic: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/raising-money-for-a-startup https://www.khanacademy.org/economics-finance-domain/core-fi...

by howeyc 13y ago

benmccann 13y ago

The company issues new shares and the funds go into the company bank account. You own the same number of shares as before, but a lesser percentage.

deleted 13y ago

[deleted]

jfoutz 13y ago

That's sorta it, yeah. rather than the money going into your personal bank account, the company sells part of itself, and the money goes in the company's bank account.

JeffJenkins 13y ago

The really short version is that the company sells (probably newly created) shared in exchange for money. The owners of the company are generally not selling their own shares. That would lead to serious complexity. If you want to know more, read Venture Deals[1]. It's very thorough and well written. [1] http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist-ebook/dp/B00AO2PWOI/ http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...

mattzito 13y ago

Okay, so yes, you are mechanically correct in that if you sold 10% of your shares for $1m, you would get the cash not the company. However, the way funding events work in real life is that new shares are created by the company and then sold to the investors. As a very math-simple example, I have 1m shares in my company, and I own 100% of them. Some VCs want to take a ~33% share of the company for $5m. My "board" (me) creates 500k new shares, and sells/gives them to the investors for $5m. Now there are a total of 1.5m shares, of which I own 1m, and the VCs own 500k. EDIT: sometimes, though, a founder will sell part of their shares to the VCs during a funding event. That's usually to help give the founder a little liquidity and cash.

deleted 13y ago
[deleted]
draz 13y ago
I think it's more typical to issue, for example, 10M shares, take 3M for yourself, and leave the rest for employees/VCs/whatever (rather than issue new ones, in a first round)
- mattzito 13y ago
  Yeah, you're right, that's often the case, especially when you have cofounders and early employees that you don't want to dilute during the first funding round. However, I just wanted to keep the example simple, I thought it was easier to talk about creating shares than deal with the "who owns the unissued shares" notion. But yeah, that's a good clarification.
howeyc 13y ago
This answers my question, thank you. I had never thought of the company itself creating more shares, this is what I was missing in my thought process.
- beachstartup 13y ago
  this is also how dilution happens - more shares are issued, and then everyone with existing shares owns a smaller % of the total amount. VCs everywhere will always prefer to work with their lawyers to make sure this goes in their favor. it pays to use your own lawyer so that all of this stuff happens on your own terms. lawyers are responsible to the party who pay their fees, so watch out if anyone seems overly generous with helping you out with legal bills.

draz 13y ago

I'm not sure I understand the question. What do you mean by "you have money in your personal bank account?" Are you saying that some of the money put in by a VC ends up in your personal bank account? If it does, it's through a salary you withdraw from the company. VCs, or any investor, will want X seats in your board, which will also give them a say about your salary. So if you got $1M in funding, no sane board will allow you to take a $700K salary. Your win from the investment is that now your company has money to move faster, by hiring more talented people, buy equipment that is important to the business, pay vendors, etc. In short, to scale. You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off. Your motivation, then, is to increase the value of the company so that % you have in the company will translate to more money in the cases I mentioned. After this long answer, I feel like I still haven't actually answered your question because you're probably asking about something more subtle :-)

objclxt 13y ago
> You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off If Evan Spiegel and Bobby Murphy weren't taking $10 million+ off the table during funding rounds they'd probably be far less likely to turn down a $3 billion offer. It is fairly common for founders to trade personal stock for cash during a funding round. Perhaps you mean during initial funding? It is absolutely possible - and common - for founders to take money of the table during secondary funding rounds.

chrisboesing 13y ago

Khan Academy has a nice 12 minute long video on this topic: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/raising-money-for-a-startup https://www.khanacademy.org/economics-finance-domain/core-fi...