We wrote a blog recently looking at the level of founder ownership at exit/IPO. That blog showed the median and average levels of founder ownership were 15% and 21% respectively. Similarly, below we look at VC ownership of these same companies. Of the 111 tech companies we looked at, the median and average level of VC ownership at exit was 55% and 52% respectively. In other words, by the time of exit, VC will likely own half your business.
A few observations:
-Businesses that tend to be less cash needy have higher levels of ownership for the founders. For instance, ecommerce and hardware, both of which are sectors which tend to generate cash, had median founder ownership levels of 31% and 29% respectively, which is much higher than the median of the entire data set (15%).
-Businesses that have a high level of founder ownership, but were very cash inefficient, were able to preserve founder equity because they raised subsequent rounds at very high valuations. Very few startups have this luxury and it shouldn’t be depended upon to preserve your ownership.
-Certain VC showed up on the list repeatedly. Frequent appearances were made by Benchmark, Sequoia, Greylock, Bessemer, and Khosla, among others. Indeed if you can raise capital from the names on this list, you’ll have someone in your corner that has shepherded companies to the promised land before. Arguably the odds of success (defined as going public/exiting) increase.
-Strategic investors, which are corporations that make venture investments, were only present in 16 out of the 111 IPO’s we looked at. It leads us to conclude that while a strategic investor can be valuable, they’re not necessary for success. Strategic investments in the list include Delta Airlines investing in Priceline, USAA investing in TrueCar, Fox investing in Roku, etc.
-If VC own on median 55% and founders own on median 15%, where does the other 30% go? A variety of places including to employees via stock options, to companies you’ve acquired along the way where part of the price was paid in stock, to board members, to consultants for their services, etc. 30% is a big number so as you can see, little grants here and there add up.
In order to preserve your equity, run your business as lean as you can and make cash efficiency and frugality a part of the culture. Scrutinize ever option grant no matter how small because over the long run it does add up. Also be very cautious about granting equity in M&A or for services - if you’re successful, those shares you gave away to your board members, lawyers, accountants etc will end up being the most expensive services you ever bought.