Equity, Valuation, and Getting Rich

I am here to tell you an undeniable fact. You will not get rich from your first startup. Let the responses now come.

Yes. there are exceptions, but in the grand scheme of things, these people are rare. Do not count on being one of the wealthy (or 0.0001%) from your endeavor.

Think Different

In order to have a successful company, you need to have cash. This money is multi-purpose, but is initially used for salary for your first few hires and maybe some marketing.

Businesses cannot run without money, plain and simple. Obtaining the money to run your startup can come from many different places.

• Venture Capital (Arguably the most common)
• Loans
• Credit Cards

Keep these other options in mind. There are always other ways to fund your idea than raising venture capital.

Don’t Concern Yourself with Valuation

I know this will not be a popular thought.

Understanding that business require money to operate is the key concept to understand, before understanding why I am telling you not to focus on valuation. If you feel yourself arguing with me on this point, make sure you fundamentally understand that businesses require money.

If running a successful startup is your main concern (If it isn’t, what is?) then you understand you need money to operate.

Obtaining capital from Venture is not a conversation, it is a monologue. If the valuation of your company is too high, a VC is not going to talk you down from the price. They will just say No and walk away.

The VC has all day to hear and determine deals. If you valuation is too high, he will wait for the next person, that pitches him the same idea have a lower valuation, and that is who he will invest in. Venture capitalists want deals.

The mentality of setting a high valuation is human nature. As humans we want to keep what is ours at all costs. We think our stuff is worth much more than what it actually is. Think about the last garage sale you went to. You want $10 for this lamp? How about a $1?

Getting Rich or Having a Certain Percentage

I recently tweeted a link to an excellent article on calculating the equity you should give people joining your company. It is written by Jason Cohen (@asmartbear). I received the following response.

@miscsecurity @asmartbear the analysis forgot to account for dilution

— Mike Gagnon (@MichaelNGagnon) February 9, 2012

This began a dialogue between Michael, Jason, and Myself.

I explained to Michael how dilution doesn’t need to be taken into account. If your percentage of ownership is being diluted, meaning more shares are being issued, from additional financing then your share price is going up. Jason threw the nail in the coffin with:

I think the goal is to get rich, not to own a certain %. If you dilute, it’s because the pie is even bigger.

Sometimes the things we care about (In this case, total ownership of the company at the end) doesn’t matter in the grand scheme of things.