The Angel VC


The Angel VC

This post will likely not make me more popular and may offend some individuals. But if your core beliefs about how business should be achieved are in stake, you can’t make an effort to win the popularity contest. In the event that you know me a little you’ll probably concur that like everyone at Point Nine, I’m a pretty nice guy. We’re trying hard to make venture capital a more human little, and we really mean it whenever we say that people aspire to be good VCs.

I’m confident that virtually all if not all of the greater than 200 founders we’ve worked with over the last a decade would verify this. I’m not saying this to brag or even to say that we’re perfect (which we are not, of course). In the last year, we’ve seen, on more than one occasion, a behavior among later-stage VCs that we’ve before rarely observed in the years. Here’s what I’m talking about. In the last 12 months or so it happened many times that later-stage VCs, within financing rounds, offered a “re-up” (i.e. new shares or options) to founders of portfolio companies.

By accomplishing this, they try to partially or completely offset the dilution (i.e. reduction of possession percentage) experienced by the founders in the funding round. If you think “Great, if founders get more shares and are diluted less, that’s awesome! “, think about the impact which this maneuver is wearing the existing investors of the business (as well as on employees keeping options or shares).

If founders get a re-up, every single talk about, option, or ownership percentage that they receive (obviously) must result from someone. And that someone are the existing shareholders of the business. Oftentimes, the re-up shares are proposed to emerge from the pre-financing cap table, in which case it’s apparent who bears the dilution. It is suggested that the re-up shares are created post-financing Sometimes. The latter might make the maneuver appear fairer on the surface, as it appears as if the new investors joined the prevailing investors in paying the purchase price for the additional founder shares.

But should you choose the math, you will see it doesn’t solve the crux of the problem. More on that in the example below. An buyer who suggests a founder re-up will that, of course, to make his/her offer more appealing to the founders in order to boost the chance of earning the offer. 120M pre-money and a creator re-up of 10% pre-financing (which equals a transfer of 3% of the post-financing equity from the prevailing traders to the founders).

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As you can view, the founders are better off in the second scenario, in spite of a ca. 15% lower valuation. For everyone situations, I assumed that before the financing round, the founders and the existing traders own 60% and 40%, respectively, of the company. 30M come from the new investor. 120M (Scenario 1A). In this situation, the founders and existing traders would keep 45% and 36.25%, respectively, after the round.

But VC 1 doesn’t want to lose the deal, of course. He/she could raise the valuation to make his/her offer more appealing, but hey, that would reduce his/her stake. So instead of offering a valuation that is add up to or higher than what VC 2 has offered, VC 1 now proposes a founder re-up of 10% of the pre-financing equity. Not quite: The existing investors’ stake in Scenario 1B is reduced from 36.25% to 33.25%, exactly by the three percentage factors by which the founders’ stake is increased because of this of the re-up. This is the 3% transfer from the existing investors to the founders that I’ve pointed out a few paragraphs back.

160M. You can view this in Scenario 1D. By offering a re-up instead, VC 1 were able to make his/her provide top offer for the founders while offloading 100% of the costs of the re-up to the existing investors. Scenario 1C shows what goes on if the buyer is willing to do the re-up following the financing.