US Corporate Law 20 Episodes (12)
How much equity should I give to investors? Why did Wu Hai, founder of Orange Hotel, drank too much and slept on the road
How much equity should I give to investors? Why did Wu Hai, the founder of Orange Hotel, slept on the road after drinking too much | The secret of Term Sheet's shareholding | The founder is the company's surrogate mother? Investors are the parents of the company | Sina, Vanke, South Beauty, Prince Niao, Qunar, Ele.me, Twitter, Uber
In the last issue, we talked about a term of the Term Sheet - Pre-money valuation, and the corresponding option pool, an important factor affecting its actual value. The question we are going to talk about in this issue is related to valuation, that is, how much shares should be given to investors when they are in the capital.
Let me tell you the names of a few companies. Sina, Vanke, South Beauty, Prince Milk, Qunar, Ele.me, Orange Hotel, Autohome, NVC Lighting, Twitter, Uber.
There are Chinese companies and American companies, but they all have one thing in common, that is, after the company succeeds, the founder is kicked out. Among them, Wu Hai, the founder of Orange Hotel, once wrote an article after the company was acquired, "Sold the hotel, last night, I was drunk and slept on the road for a night." Many people know Wu Hai, often because This article, not because of the Orange Hotel.
Wu Hai even said that the founder is the company's surrogate mother, and the company grows up, as long as the investors are called parents.
On the other hand, Jack Ma, a self-made entrepreneur, said that "investors are just uncles of startups, not biological parents."
The reason why Wu Hai’s situation happened before is often because the founder gave too much profit in order to get investors’ money. Everyone who comes out to open a company, if not all with the heart to change the world, must have the heart of being the master of his own. But people are poor and short-sighted. When looking at their company's monthly expenses of several million, the founders often have to pay for five buckets of rice.
At this time, as an entrepreneur, faced with millions of financing and tens of millions of valuations, you must think about whether I need investors’ money now, and if so, how much. There are a lot of great startups that have only raised an early round of funding from investors and quickly started making money. Then the founder still holds more than 80% of the company when the company exits. In other words, it doesn’t mean that a company that takes investors’ money round by round is not necessarily the best startup.
Like the example we gave in the previous lecture, Pre6 voted 4. Of course, it is a relatively extreme example. It means that the investment is over, the investor has taken 40%, and the founder has only 60% left. In real life, it is common that investors will get 10-20% of each round of investment. We assume that each round of investors comes in with a 20% dilution. So
1. After the seed round, founders and investors account for 80% and 20% respectively
2. After the A round, the founders, seed round investors and A round investors account for 64%, 16% and 20% respectively
3. After the B round, the founders, seed round investors, A round investors and B round investors accounted for 51.2%, 12.8%, 16% and 20% respectively.
It can be seen that in a very normal situation, the founders have only 51.2% after the B round, and soon dropped by half. Some investors even want more, and the founder has become a minority shareholder after the B round.
The young talents who gave up the favorable conditions of big companies and came out to start their own businesses are just to be their own bosses, but they did not expect to become part-time workers so soon.
Do what you can and stop at it. Equity is the least valuable thing when the enterprise is not established, but once the enterprise is established, equity is the most valuable thing.
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