The Normal Level of VC and CEO Ownership at Exit
Recently we wrote a post which looked at the level of ownership and salary of CEOs at the point when their company went public (“The Reasonable Level of CEO Ownership & Salary for a Startup”). It was a popular post so we decided to take it a step further, looking at the level of VC ownership of those same companies at the time they went public. The data and observations are below.
[LinkedIn won't let me publish the table, but can be found here]
-The table shows that upon going public/exit, the median and average ownership of the VC and strategic investors was 59.45% and 54.67%. What the data is telling us if you want a truly large exit similar to the tech bellwethers above, it’s not uncommon to raise outside capital thereby ceding significant ownership, and even control, to VC. Look at your relationship with a VC as a marriage: you’re going to love each other, sometimes you’ll hate each other, and you’re going to fight (a lot), so it’s critical to pick investors you really enjoy working with.
-There are a number of VC that show up repeatedly including Bessemer, Benchmark, Charles River, Metrix, Greylock, and Sequoia. VC tend to invest in packs, so watching what these VC and others do in the market can give you a sense of what’s resonating with large investors.
-Atlassian, Salesforce, and Workday are truly standouts in that their founders were able to build massive businesses without giving up much ownership to VC. They did this primarily by being cash efficient and building real business that generate cash (each generated free cash flow of $100mm, $1.6bln, and $259mm last year). Cash efficiency and generating cash are two goals that any entrepreneur should strive for not only to build a more recession resistant business but also to preserve equity.
-The spread of CEO ownership levels is wide, ranging anywhere from 3.6% on the low end to 53.40% on the high end. The median ownership level is 7.60% which given the size of these companies, makes every founder a millionaire many times over. If you’re a founder at a Series A level business, don’t overly stress about dilution if your ownership is low: a good board needs to refill the option pool with every round of which you should be allowed to take part. Even founders at the IPO/Exit level take significant share issuances the year before the IPO (the CEO of Fitbit was issued $7mm+ worth of options before exit).
In conclusion, build a business as cash efficiently as possible. If you’re looking for a truly large exit, understand that taking on VC and even ceding control may be a necessary, so taking the time to make sure you’re really partnering with the right, honest investors is critical. Make sure to ask for plenty of referrals to past/current portfolio company CEOs (you tell the VC who you want to talk to) and understand how they’ll behave, especially when things go wrong.
See more at https://danfundllc.com/blog.php