Startup psychology 101 - 1

Living in Cambridge, I get into discussions all the time with people who don't really understand how startups work. Being clever types (well clever in some ways - they still wear their pants outside their trousers for the most part), they can still miss the point about their part of any new venture.

When the business get it's intitial funding round, they are always pleased and always quote the percentage of the company that they 'own'. The difficulty is they never let go of the percentage fixation so when more money comes in, they get all upset about the dilution instead of concentrating on the 'value' of their shares.

They will have a lower percentage of the company after more money comes in but the value of the shares should have gone up considerably more. You might 'lose' share of the company by say 25 - 40% but your shares might be worth ten times as much.

Think about this example if you dare. If you choose not to continue then I don't blame you as it is a bit dull but you need to understand this in a startup to avoid looking a prize fool in front of investors. (I'm not reading any further as I am boring myself with this but my fingers will keep typing anyway).

Imagine you have 10% of a company initially with your shareholding having a value of £10,000 equalling 10,000 shares issued at £1. That values the whole company at £100,000. Now in the next round of funding someone comes in with £1,000,000 for 40% of the business. The 40% is after there money has been added so increases the number of shares to 140,000.

The interesting thing is that the shares are now worth far more. The amount paid for the new ones was £25 a share. The person with 10% of the company now only has 10000/140000 of the company or 7.1%. Should they be upset? Well actually no. Their shares were worth £10,000 but are now worth £250,000 (£25 x 10,000).

The moral of this tale. Look at the value and forget the percentage shareholding.

© Copyright 2005 Richard A D Jones 2005