Bah I have fallen for one of the classic Silicon Valley traps: describing a funding round in jargon which is high-bandwidth for experts and opaque for non-experts at the same negotiating table. That deal was: “Buy 25% or company for $5 million.”
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Post-money valuation minus pre-money valuation naturally equals the money (investment). Investment divided by post-money valuation equals ownership stake. That this is confusing is, well, not historically speaking an accident. It’s like the “four corners” game in car sales.
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(Four corners is a way car sales reps are trained to present offers to car buyers in a way which prevents the car buyer from understanding the totality of the deal and negotiating it competently.)
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(It’s so successful at that that, even having had it explained to me twice, I think I would not understand it in the moment. And I’m reasonably proficient at mental math and, one would hope, negotiating larger and more complicated deals than for a car.)
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Apparently it is called “four squares” if you want to Google; was working off a 20 year old memory.
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They were likely diluted to about 10~12% or so, so my math is about $5M. The $5M for employee is heavily sensitive to how much of the option pool was awarded and how much vested. In cases where it would be pathologically less, I would expect a founder to go to bat with acquirer.
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That could sound something like “We agree that the purchase price for the company is .$35M which is split $20M to VCs and remainder to us. Employee equity is valueless. You put $5M into an incentive pool for the team; total transaction size $40M.”
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If you’re curious on the handwavy math: Company’s (post-money) valuation after the investment was $20M. 2x outcome = was acquired for $40M. VC receives, probably, $10M. I assumed there were angels or an accelerator who did a small round and, as of that round, owned 1X%.
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It's worth knowing how big the fund is. 3x on 15% of the fund is different than 3x on 3% where the VC expected to dial in up to 25% in follow-on rounds.
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This is the dumbest bit of vc groupthink of them all imo. The outliers are completely unpredictable -- so why pick *worse* companies that have better stories about 100x return? Those stories are no signal of anything. May as well use signals of competence.
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