Beginner's Guide to Cap-Table Dilution: Cloudera's $1B Fundraise

http://thedavidrees.blogspot.com/2015/03/the-beginners-guide-to-cap-table_29.html

by reesdreesd • 11 years ago

90 20 11 years ago

thedavidrees.blogspot.com

CPLX• 11 years ago

This analysis is dubious. The main problem I see just eyeballing the numbers is that the ratio of the funds raised in each round to the post-money valuation averages around 1:6 to 1:8. Or said another way, the investors in each of the rounds are buying around 12%-18% of the company during the round.

I'm not an up to the minute expert so maybe this is the new normal, but in my experience, those ratios are usually more like 1:3 or 1:4. It's pretty normal for VC's to own 30-35% of the company after a Series A.

Very hot and high growth companies (Facebook, famously) have been able to sell off single digit percentages of the company with incredibly high valuation increases between rounds. But those results may not be typical.

mathattack2• 11 years ago

The general premise still holds though - As long as the pre-money in a round exceeds the post-money in the prior one, the owners are worth more. The analysis is over-simplified, but it still explains the situation clearly.

As for how much is given away... I think Cloudera is a special company. Most of the unicorns are. The same strength ("We can wait on the money") that gets them to a billion is also what allows them to get away with less dilution.

hisabness• 11 years ago

your analysis is flawed. it really depends on the valuation at which each round is raised.

trhway• 11 years ago

Very hot and high growth companies (Facebook, famously) have been able to sell off single digit percentages of the company with incredibly high valuation increases between rounds.

well, one can see how selling only single digits (at sufficient valuations to fund the company's progress) may in turn have potential to make the company very successful - by preserving founder(s)'s control and thus allowing the founder(s) to drive the company further. Basically taking control out of founders' hands VC risk ending up with bigger share of less successful company.

exelius2• 11 years ago

His numbers are wrong (and he admits as much), but they're really just illustrative anyway. The entire point he's making is that if you're growing quickly, dilution isn't a big deal.

And the VC equity split usually changes by round and market conditions: A is usually 30-35%, B is usually 15-20%, C+ are usually <=10% (this is for a typical startup; Cloudera is a unicorn so the rules are out the window). The general rule of thumb is that founders drop below 50% sometime around the C round. Most VCs are hesitant to dilute founder equity too early because it can hurt recruiting and make it harder to fund later rounds.

paulsutter• 11 years ago

Biggest omission is the option pool. The option pool is expressed as a percentage of the post money shares, and can range from 20-40%.

A 30% option pool would make the founders stake 50% after the hypothetical series A, not 80%.

Not to mention any seed investors, whose stake would also be deducted from the hypothetical founders stake in the series A. And by the time of a Series F', there has usually been additional dilution from expansion of the options pool, warrants issued for venture debt, etc.

If you're wondering, why is the options pool included in the pre-money valuation, when those shares haven't even been issued yet? VCs probably started this practice to make their offer seem more impressive. I'd love to hear any other explanations, it's a curious phenomenon.

EDIT: While its true that option pools have gotten smaller recently, that does mean the pool needs to get expanded again more and sooner, certainly by a series F'.

tzm• 11 years ago

Great point. But, 20-40%? I haven't seen this (yet). Option pools have been 10-20%, with most being 15%. Perhaps I'm a fish out of water.

erichurkman• 11 years ago

No, you're not out of water on that. 20 - 40% is way out of bounds, even on very large VC-backed companies.

15% is a good median. Some do go higher but use the option pool to issue portions of the founders' equity, but that's rare.

AndrewKemendo• 11 years ago

Anymore we (founders) are pushing to put the options pool in the post money, so that founders, and as a result seed investors, don't see the equity hit.

elsewhen2• 11 years ago

i think the article should at least mention the liquidation preferences of the VC investors. for example, if the if the company sells for less than the $1B amount raised, the founders would likely end up with zero (assuming that the investments were made with a 1x liquidation preference).

boomzilla• 11 years ago

That's right. Does any know what's the standard participating and liquidation preferences these days? I know first hand a technical founder who made almost nothing from a >100M exit because the investors got 2x the money they put in first, before the rest is distributed to the common stock holders.

elsewhen2• 11 years ago

1x liquidation preferences are the standard in tech investments these days.

exelius2• 11 years ago

The rule of thumb with dilution is that you probably shouldn't worry about it too much unless you have to take a down round. That's when your investors' anti-dilution clauses will kick in and eat away at the founder/employee pool (their dilution protection comes at your expense).

greghendershott• 11 years ago

Another way to feel better about dilution is to realize that the valuation after every round is a mutually agreed abstraction. Until some actual liquidity event puts cash in hand, you have valuation not value.

The only meaningful dilution is the one where the founders become minority shareholders. Although loss of control isn't necessarily bad and can eventually pay off, unlike valuation it is not abstract, it's tangible.

serve_yay• 11 years ago

Another way to feel better about dilution is to realize that the valuation after every round is a mutually agreed abstraction. Until some actual liquidity event puts cash in hand, you have valuation not value.

Yeah, but your ownership stake tells you how much of the value is yours. So it kinda doesn't matter that valuations are hypothetical -- 75% of $any amount is less than 50% of that amount.

the_watcher• 11 years ago

The primary takeaway here, to me, is to remember that when fundraising, the goal is to increase the size of the pie, and that 1% of 1 billion is substantially more raw value than 100% of 5 million.

forrestthewoods• 11 years ago

Holding own to 28% after 7 rounds seems... optimistic?

rokhayakebe• 11 years ago

More helpful data would be 1) How many founders end up raising $1B and 2) how much equity each ended up with. Let's use historical data to support 28% after x rounds.

philrapo• 11 years ago

Here's an infographic showing ownership in Box as they IPO'ed. https://equityzen.com/blog/box-path-to-ipo/

Beginner's Guide to Cap-Table Dilution: Cloudera's $1B Fundraise

Related Stories