This Week in Venture Capital - Kelly Hwang, Associate at GRP

This week we have Kelly Hwang, Associate at GRP. For more information, show notes, and an upcoming schedule, go to www.thisweekin.com. Mark Suster hosts This Week in Venture Capital.

The following is from Mark Suster's post on http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-...

How VC's Calculate Valuation: We walked through a standard deal where you raise $1 million at a $3 million pre-money valuation leading to a $4 million post money valuation. The math works out that the investor owns 25% of the company post deal ($1 million invested / $4 million valuation) and assuming 1 million shares, each share would be valued at $3 / share ($3,000,000 pre-money / 1 million shares = $3 / share). Investors own 25%, the founders own 75%. NOTE: In the video I talked about how VC's and entrepreneurs decide the total number of shares at the first major funding round and why it's often a high number.

But this example above is all entrepreneur math, not the VC's. The VC assumes you'll have an option pool. That's normal. You'll need to hire and retain talen to grow your company. Those options need to come from somewhere. The more senior members you have (say you already have a CEO, CTO, VP marketing, VP Biz Dev, VP Products) then the less options you'll need and vice versa. Industry standard post your first round of funding will be 15-20%. I say "post" funding because you'll need more than this amount pre-funding to get to this number after funding. We walk through this in the video.

To view the more detailed account please go to http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-...

Term Sheet Overview:

The second most important economic term in the term sheet other than price is "liquidation preference." This states how the proceeds from a sale or dissolution of the company will be distributed. Investors will always want to get their money out of the company before founders, which in the case where the company is sold for a low price is fair. You almost certainly will have liquidation preferences if you raise VC so don't worry about having them.

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-...

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Starring:

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• Ian Hinck
• Kenny Chen
• Ben Wilbur
• Branden Lymer

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• Sam Osborn

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[KKTTRR1]

thanks - clear and concise

[MadeleineCag]

these are hard issues, presented as clearly as I have seen in under an hour. Thanks.

[aseohosting]

Interesting post. I have made a twitter post about this.

[aseideman]

Great video. One thing not clear to me is why VCs try to make the option pool so big - aka "cram it into the pre money" - if in the end, they own the same percentage of the company. In the first example given, the VC gets 25% of the Co for $1MM. So who cares what the option pool is? Yes, it lowers the price per share but if the end result is the same (25% for $1MM) then what's the point?

[seekperfection]

I'm all about peak performance...constantly looking for the next edge.

[MrHastadam]

this is what happens to the guy in the movie "social network". those bitchaaz fooled the poor guy :(

[masterdeviance1985]

Surprised how upfront Mark is about the VC psychological trick of starting with 1,000,000 shares. Good stuff.

[callloop]

Great video! The # of shares really made sense. I'd rather gie away 30K shares rather than 3.

[comster]

Mark, Kelly,

Thanks for the lesson!

-J

[CharlieOFlaherty]

Another great show, thanks. It is refreshing to have so much transparency from your side of the table!