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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 eve
by 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 agoI 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 agoYeah, 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 agoThis 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 agothis 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.