How Funding Works – Splitting The Equity Pie With Investors

A hypothetical startup will get about $15,000 from family and friends, about $200,000 from an angel investor three months later, and about $2 Million from a VC another six months later. If all goes well. See how funding works in this infographic:

First, let’s figure out why we are talking about funding as something you need to do. This is not a given. The opposite of funding is “bootstrapping,” the process of funding a startup through your own savings. There are a few companies that bootstrapped for a while until taking investment, like MailChimp and AirBnB.

If you know the basics of how funding works, skim to the end. In this article I am giving the easiest to understand explanation of the process. Let’s start with the basics.

Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.

Splitting the Pie

The basic idea behind equity is the splitting of a pie. When you start something, your pie is really small. You have a 100% of a really small, bite-size pie. When you take outside investment and your company grows, your pie becomes bigger. Your slice of the bigger pie will be bigger than your initial bite-size pie.

When Google went public, Larry and Sergey had about 15% of the pie, each. But that 15% was a small slice of a really big pie.

Funding Stages

Let’s look at how a hypothetical startup would get funding.

Idea stage

At first it is just you. You are pretty brilliant, and out of the many ideas you have had, you finally decide that this is the one. You start working on it. The moment you started working, you started creating value. That value will translate into equity later, but since you own 100% of it now, and you are the only person in your still unregistered company, you are not even thinking about equity yet.

Co-Founder Stage

 As you start to transform your idea into a physical prototype you realize that it is taking you longer (it almost always does.) You know you could really use another person’s skills. So you look for a co-founder. You find someone who is both enthusiastic and smart. You work together for a couple of days on your idea, and you see that she is adding a lot of value. So you offer them to become a co-founder. But you can’t pay her any money (and if you could, she would become an employee, not a co-founder), so you offer equity in exchange for work (sweat equity.) But how much should you give? 20% – too little? 40%? After all it is YOUR idea that even made this startup happen. But then you realize that your startup is worth practically nothing at this point, and your co-founder is taking a huge risk on it. You also realize that since she will do half of the work, she should get the same as you – 50%. Otherwise, she might be less motivated than you. A true partnership is based on respect. Respect is based on fairness. Anything less than fairness will fall apart eventually. And you want this thing to last. So you give your co-founder 50%.

Soon you realize that the two of you have been eating Ramen noodles three times a day. You need funding. You would prefer to go straight to a VC, but so far you don’t think you have enough of a working product to show, so you start looking at other options.

The Family and Friends Round: You think of putting an ad in the newspaper saying, “Startup investment opportunity.” But your lawyer friend tells you that would violate securities laws. Now you are a “private company,” and asking for money from “the public,” that is people you don’t know would be a “public solicitation,” which is illegal for private companies. So who can you take money from?

1. Accredited investors – People who either have $1 Million in the bank or make $200,000 annually. They are the “sophisticated investors” – that is people who the government thinks are smart enough to decide whether to invest in an ultra-risky company, like yours. What if you don’t know anyone with $1 Million? You are in luck, because there is an exception – friends and family.
2. Family and Friends – Even if your family and friends are not as rich as an investor,  you can still accept their cash. That is what you decide to do, since your co-founder has a rich uncle. You give him 5% of the company in exchange for $15,000 cash. Now you can afford room and ramen for another 6 months while building your prototype.

Registering the Company

To give uncle the 5%, you registered the company, either though an online service like LegalZoom ($400), or through a lawyer friend (0$-$2,000). You issued some common stock, gave 5% to uncle and set aside 20% for your future employees – that is the ‘option pool.’ (You did this because 1. Future investors will want an option pool;, 2. That stock is safe from you and your co-founders doing anything with it.)

The Angel Round

 With uncle’s cash in pocket and 6 months before it runs out, you realize that you need to start looking for your next funding source right now. If you run out of money, your startup dies. So you look at the options:

1. Incubators, accelerators, and “excubators” – these places often provide cash, working space, and advisors. The cash is tight – about $25,000 (for 5 to 10% of the company.) Some advisors are better than cash, like Paul Graham at Y Combinator.
2. Angels – in 2013 (Q1) the average angel round was $600,000 (from the HALO report). That’s the good news. The bad news is that angels were giving that money to companies that they valued at $2.5 million. So, now you have to ask if you are worth $2.5 million. How do you know? Make your best case.  Let’s say it is still early days for you, and your working prototype is not that far along. You find an angel who looks at what you have and thinks that it is worth $1 million. He agrees to invest $200,000.

Now let’s count what percentage of the company you will give to the angel. Not 20%. We have to add the ‘pre-money valuation’ (how much the company is worth before new money comes in) and the investment

$1,000,000 + $200,000=              $1,200,000  post-money valuation

(Think of it like this, first you take the money, then you give the shares. If you gave the shares before you added the angel’s investment, you would be dividing what was there before the angel joined. )

Now divide the investment by the post-money valuation $200,000/$1,200,000=1/6= 16.7%

The angel gets 16.7% of the company, or 1/6.

How Funding Works - Cutting the Pie

What about you, your co-founder and uncle? How much do you have left? All of your stakes will be diluted by 1/6. (See the infographic.)

Is dilution bad? No, because your pie is getting bigger with each investment. But, yes, dilution is bad, because you are losing control of your company. So what should you do? Take investment only when it is necessary. Only take money from people you respect. (There are other ways, like buying shares back from employees or the public, but that is further down the road.)

Venture Capital Round

Finally, you have built your first version and you have traction with users. You approach VCs. How much can VCs give you?   They invest north of $500,000. Let’s say the VC values what you have now at $4 million. Again, that is your pre-money valuation. He says he wants to invest $2 Million. The math is the same as in the angel round. The VC gets 33.3% of your company. Now it’s his company, too, though.

Your first VC round is your series A. Now you can go on to have series B,C – at some point either of the three things will happen to you. Either you will run out of funding and no one will want to invest, so you die. Or, you get enough funding to build something a bigger company wants to buy, and they acquire you. Or, you do so well that, after many rounds of funding, you decide to go public.

Why Companies Go Public?

There are two basic reasons. Technically an IPO is just another way to raise money, but this time from millions of regular people. Through an IPO a company can sell stocks on the stock market and anyone can buy them. Since anyone can buy you can likely sell a lot of stock right away rather than go to individual investors and ask them to invest. So it sounds like an easier way to get money.

There is another reason to IPO. All those people who have invested in your company so far, including you, are holding the so-called ‘restricted stock’ – basically this is stock that you can’t simply go and sell for cash. Why? Because this is stock of a company that has not been so-to-say “verified by the government,” which is what the IPO process does. Unless the government sees your IPO paperwork, you might as well be selling snake oil, for all people know. So, the government thinks it is not safe to let regular people to invest in such companies. (Of course, that automatically precludes the poor from making high-return investments. But that is another story.) The people who have invested so far want to finally convert or sell their restricted stock and get cash or unrestricted stock, which is almost as good as cash. This is a liquidity event – when what you have becomes easily convertible into cash.

There is another group of people that really want you to IPO. The investment bankers, like Goldman Sachs and Morgan Stanley, to name the most famous ones. They will give you a call and ask to be your lead underwriter – the bank that prepares your IPO paperwork and calls up wealthy clients to sell them your stock.  Why are the bankers so eager? Because they get 7% of all the money you raise in the IPO. In this infographic your startup raised $235,000,000 in the IPO – 7% of that is about $16.5 million (for two or three weeks of work for a team of 12 bankers). As you see, it is a win-win for all.

Being an Early Employee at a Startup

Last but not least, some of your “sweat equity” investors were the early employees who took stock in exchange for working at low salaries and living with the risk that your startup might fold. At the IPO it is their cash-out day.

Inspired by: How to Fund a Startup, Paul Graham

Written by Anna Vital

Information Designer and Infographic Author

5 Signs Your Long Distance Relationship Is Worth The Extra Effort

I’m sure many many of us in long distance relationships wonder whether this is worth the investment of our time, emotions, or energy. So I have come up with a list of five things to act as a guideline to help gauge whether or not it is in fact worth it and if they are indeed a keeper (or not. Yikes).

1. Time difference has no hold on the relationship. Not that much at least.

So yes. With distance, there is almost always that added bonus of a time difference. But, the person you’re dating thinks that staying up till godforsaken hours is worth it just to hear your silly story about how you encountered a smelly man while queuing up at McDonalds. It’s day time for you. You’ve had a good rest while they’ve been up for more than 24 hours and are fighting sleep just to talk to you for a while or to see your face on Skype or FaceTime.

This might not be the smartest move on their side, but they’re going to do it anyway. Let’s not be logical and revel in how sweet it actually is. And remember not to encourage them to do this frequently. You may be the death of your significant other.

2. You’re treated right yesterday, today, tomorrow and on your birthday.

Yay! It’s your birthday but bummer, they’re not here to spend it with you. But somehow despite that, they still make sure you’re treated like you ought to be (which is to say, well) on your birthday. You get a huge bouquet of flowers, cake, and maybe even a color pencil set thrown in (for good measure). Even when it’s not your birthday, they still find ways to surprise you with gestures that leave you in no doubt that they love you.

3. The people in their everyday life know who you are.

And not in a creepy way too. This most probably means that they’re not ashamed of you and talk about you. This also most probably means that you both Skype frequently. So all is good. However if their housemates get creepy, maybe it’s time to ask them to move out.

4. They share their world with you.

Even if they’re just going grocery shopping or to Frisbee practice, you always know and you get pictures and videos of the town and city they’re in. They show you the baking utensils aisle because they know you like to bake, or shows you that cozy blanket they’re going to buy because their blanket is now better than yours.

5. They’re reachable anytime.

Not in a needy way but if you are freaking out over that test or presentation or job interview tomorrow, they are going to be there to calm you down and maybe throw in a stupid comment or two (or 10). Bottom-line is, they’re your best friend.

I’m not saying that they’re perfect if they are all this, or that they don’t make the cut if they don’t meet all the five requirements above. You would know that they’re a keeper if they are. You wouldn’t have a hard time being convinced they are so; and fighting for the relationship isn’t as grueling because they’re worth it. If you are dating a keeper, keep them and don’t ever find reasons to let go.

20 Clever Inventions You Probably Didn’t Know Were Made By Indians

Indian inventions and discoveries have been instrumental in shaping the face of the current modern world. We picked up 20 such interesting findings out of a whole bunch that will make you go, “I didn’t know that”.

1. Buttons

Buttons were first used in Mohenjo-daro for ornamental purpose rather than for fastening. They were first used in the Indus Valley Civilization by 2000 BCE.

2. Chess

Chess developed out of Chaturanga, which is an ancient strategy board game developed during theGupta Empire in India around the 6th century AD. Now you know why Vishwanathan Anand is such a pro, rag rag me is tarah… 

3. Prefabricated home and movable structure

In 16th century Mughal India, during the reign of Akbar, the first prefabricated & movable structures were invented.

4. Ruler

Rulers were first used by the Indus Valley Civilization prior to 1500 BCE. Made of ivory, the rulers found during excavation, reveal the amazing accuracy of decimal subdivisions on it.

5. Shampoo

The word ‘Shampoo’ is derived from chāmpo (चाँपो). It was initially used as a head massage oil for the Nawabs of Bengal during the Mughal Empire around 1762. It evolved into shampoo over the years.

6. Snakes and Ladders

The game, Snakes & Ladders,  was invented in India as a game of morals. Later it spread to England and eventually introduced in the USA by game pioneer Milton Bradley in 1943.

7. Cotton cultivation (We clothed the world, yay!)

The ancient Greeks used to wear animal skins and were not even aware of cotton. But Indians were sort of cool  and started cultivating cotton during the 5th – 4th millennium BCE in the Indus Valley Civilization. The word spread to the Mediterranean and beyond and soon everyone was ordering one from Flipkart. Well, pretty much.

8. Fibonacci Numbers

The Fibonacci numbers were first described by Virahanka, Gopala  and Hemachandra as an outgrowth of earlier writings by Pingala.

9. Decimal System, Quadratic formula and Zero!

It was in 7th century CE when Brahmagupta found the first general formula for solving quadratic equations. The decimal system (or the Hindu number system), which was a precursor of the Arabic numeric system, was developed in India between the 1st and 6th centuries CE.

10. Suits Game

The popular game of cards originated from India & was known as Krida-patram (which literally means“painted rags for playing”).

11. Cataract Surgery

Indian physician Sushruta (6th century BCE) had the knowledge of performing cataract surgery. It spread to China from India. Greek scientists would visit India to get operations done and also to learn the nitty-gritties.

12. Diamond Mining

Worldwide, India was the only source of diamonds until the discovery of mines in Brazil in the 18th century. Almost 5000 years ago, diamonds were first recognized and mined in central India.

13. Water on Moon

ISRO’s Chandrayaan-1 made the startling discovery that our moon is not a dry ball of rocks. The discovery of lunar water is attributed to the Chandrayaan mission.

14.  Radio/Wireless communication

We all know that Marconi received a Nobel Prize in Physics in 1909 for contribution to the development of wireless telegraphy. But the first public demonstration of radio waves for communication was made by Sir Jagdish Chandra Bose in 1895, two years prior to Marconi’s similar demonstration in England.

Sir Bose was posthumously credited (more than a century later) for his achievement. The fact remains that this discovery truly shaped the face of modern wireless communication.

15. Flush Toilets

Flush toilets were first used in the Indus Valley Civilization. These existed in most homes and were connected to a sophisticated sewage mechanism. The civilization was prominent in hydraulic engineering.

16. Binary Code

Binary numbers were first described by Pingala (c. 200 BC). Pingala is the traditional name of the author of the Chandaḥśāstra, the earliest known Sanskrit treatise on prosody.

17. Ink

Many ancient cultures and civilizations independently discovered and prepared ink for writing purposes. The source of carbon pigment used in Indian Ink (called musi) used in ancient India, was India. Since 4th century BC, the practice of writing with ink with a sharp pointed needle was common in South India.

18. Steel & Metal works

Ancient Indians were pioneers in metallurgy. High quality steel was produced, almost two thousand years before it was understood by the West. One of the most remarkable feat in metallurgy: creating a seamless celestial globe, was invented in Kashmir. It was earlier considered impossible to create a metal globe without seams.

So thanks to India, Iron Man can wear his suit now.

19. Fiber Optics

Named as one of the 7 ‘Unsung Heroes’ by Fortune Magazine, Dr. Narinder Singh Kapany, is widely recognized as the ‘Father of Fiber Optics’ for his pioneering work in Fiber Optics technology. Watch him speak eloquently on his entrepreneurial journey.

20. Plastic Surgery

Yes, you heard it right. Indians were pioneers in Plastic Surgery too. It was carried out in India as early as 2000 BCE.

So, we’ve always been a cool country.   History is testimony to it. So what’s stopping you from being innovative? Go, win the world.

The truth about MBA- How to choose the right job on campus?

Ever wondered what does MBA stand for? I, mean, literally it stands for Master of Business Administration, but what exactly does it imply? Does it imply working for hefty salaries in dream roles or something slightly more? Most MBAs in this country are concerned about two things during their MBA: Salary and Profile. These two factors along with the location of job provide the basis for decision making about which enterprise to join after finishing their education.

If we look at the first factor, salary, can anyone say for sure they would be happy with the salary they are going to get? Normally every MBA sets a ball park figure in the mind that this is the salary he should get at least. For some, it is a figure in the range of 6-10 lacs while for some even 25 lacs is not enough. Now imagine, you get your dream salary of 20 lacs. What next? Will you be happy with the salary regardless of the role on offer? If the answer to the question is yes, this article is definitely not meant for you. 

If the answer is no or you are not sure at this moment, perhaps you should read on to discover the answer. Most aspirants have their own set of dream companies predefined in their minds which might be big league giants like HUL and Dabur for few while for others it might be VC and PE firms like Blackstone. Here are the roles that normally come on B-school campuses.

Finance

The finance MBA is normally offered the following roles:

i.Relationship Manager- While it sounds good to be working with a bank for a finance grad, this role is essentially a pure marketing role. Just like an FMCG sales profile, you will have monthly targets to fulfill towards placing financial products. Many marketing MBAs feel they are not adequately skilled for this role and those majoring in finance are more suited for it. The reality is just the opposite. If your strength is sales and basic finance interests you, this role might be a good option for you.

ii.Research Analyst- Perhaps the most coveted and best suited role for a finance MBA starting his career. The career demands will be high and one can gain an in-depth insight of a particular sector. Though, this might not be the highest money making job on campus, it definitely pays a lot in the long run. If this interests you, go for it!

iii.Operations- Not sure what kind of role this actually is- I mean I know few people who just copy one excel to another. In some ways, this is a pure low skill job and only exists in India owing to its cost advantage. For instance, you will rarely see a European or American involved in it (though it might be headed by them) in the top league companies. Having said that, you can decide if this fascinates you but I will definitely not recommend it!

iv.Investment banking-The roles that mostly come to campuses in India are back-end jobs where you act as providing supporting analysis towards clinching a deal. A few companies like SBI Cap Markets do offer front-end roles in this profile. This might be a very interesting and challenging path to begin your career and is definitely recommended.

Marketing

There are majorly two kinds of roles that come on campuses- sales and brand management. Both the roles have their unique set of challenges. Like Finance, experience in marketing will prove useful in multiple domains and one can easily move across wide array of companies. Ideally, an individual should work in a sales role for 2-3 years before moving to brand management, if that fascinates him. Brand consulting and advertising agencies are interesting career prospects to look out for in this area, even though FMCG companies remain the clear favorite of the MBA students.

Operations

If you aspire to run your business in the manufacturing sector in future, this should be your forte during placements. All the jobs here are perfect in facilitating the learning curve of a newly graduated MBA and can open doors for a consulting career in future. Moreover, in-depth understanding of any particular product, its manufacturing process and managing bottlenecks etc. is bound to pay rich dividends and one can easily find opportunities as a freelance consultant. Roles that cater to supply chain management and logistics management should be preferred.

IT

There are multiple roles that companies in this sector offer on campuses including Sales, Business Analyst, Consulting, Engagement consultant, pre-sales, etc. However, IT may not be the right sector to begin the career as an MBA as one becomes overly dependent on two factors to move ahead Technology & ‘Gas’, besides not utilizing his true potential. Ideally one should work for few years in core sectors and then switch to IT (if desired) as it offers good work-life balance along with hefty salaries. Having said that, IT companies offer similar challenges as non-IT companies at senior management level. In terms of career options, prefer product companies over service companies and in a business oriented role. So if you feel you are made for IT, go for it.

Human Resource

Roles offered on campuses are normally recruitment related. HR consulting companies that specialize in head hunting is an interesting area to target for new MBAs. In such firms, one can specialize in hiring for a particular sector and over time build his/her reputation in the market. This area too offers significantly high pays along with perfect work-life balance with plenty of time for leisure.

In case you are specializing in general management, you should choose any of the areas (excluding HR & IT) whichever interests you more. Once that is done, you should take a call on how to plan your career ahead. In case you intend to opt for a consulting career, it would be more apt to build related experience of at least 2-3 years before entering this arena. In addition to this, it would be advantageous to work in a boutique consulting firm owing to the exposure one can get.

Location, too, plays an important part in your decision making process, especially if you have family issues. But if it can be resolved, always make your decisions on the basis of the role on offer for the initial 4-5 years of your career. 

Always ensure that you work in the profile that you want to. If not, it is never too late to seek opportunities outside. However, it becomes difficult to have a profile change once you have worked in another sector (unrelated to your aspirations) for beyond 2-3 years. So make your choices wisely.

About the Author:

Abhirup Bhattacharya 

The founder of the site, he holds an MBA in Finance from School of Business Management (SBM), NMIMS University, Mumbai prior to which he has worked in the apparel sector in Egypt. He has passed CFA Level 1 examination from CFAI,USA, FRM Part I examination from GARP USA and has also cleared CAPM certification from Project Management Institute, USA. Abhirup presently works as a Senior Consultant with an IT Major and has a deep interest in Chinese Economy, Geo-Politics, Consulting and Business Valuation.

7 Reasons You Stink As A Leader

It may come as a shock to you, but just because you’re a business owner doesn’t mean you’re a great leader. If you’re the one your staff looks to for direction, this is something you’re going to have to address sooner rather than later. Here are the top 7 reasons your staff might view you as a poor leader.

1.    You Don’t Have Leadership Talent or Experience

Most entrepreneurs start a business because they love doing something, like baking cupcakes or designing websites; not because they love managing other people.

However, as businesses grow, entrepreneurs hire staff. And that’s a good thing, right? While it’s a natural course of action of any growing business, hiring staff also highlights glaring weaknesses in leadership talent within entrepreneurs.

Successful entrepreneurs often don’t know if they have leadership talent until they start hiring staff. Many others commonly demonstrate their desire and talent for leading, prior to becoming an entrepreneur. Whatever your scenario, seek leadership training if you haven’t had leadership experience before; it’ll save you from finding out you don’t have leadership talent the hard way.

2.    You Don’t Trust Your Staff

Type-A personalities tend to run rampant among entrepreneurs. And while that attention to detail and insistence on perfection will serve you well in most areas of your business, managing staff isn’t one of them. When you turn into a control freak, you tend to micromanage, which makes your employees feel like you don’t trust them to do their jobs. And maybe you don’t. Unfortunately, you have to, because you can’t do it all; this is one of the hardest lessons for an entrepreneur to learn, as giving up control can be scary for entrepreneurs who strive for perfection.

In order to maximize the value of their time, entrepreneurs should only do the things that only they can do. The rest should be outsourced.

3.    You’re a Poor Communicator

Clear communication is the key to a well-oiled machine. But nearly half of employees get confusing or unclear instructions from their superiors, which causes misunderstandings, missed deadlines, frustration, and ultimately employee turnover. If you want to hire applicants that are great communicators, you have to first teach yourself a few things about how to do it well yourself.

Make sure your instructions are clear by asking your employee to repeat them to you. Read through your emails before sending them out to ensure they’re relaying what you want, minus any emotional undertones. Consider the channels you use and choose the best for communicating what you need to say.

4.    You Have No Company Culture

Remember: this is your business, and you’re here every day because you love it and want to nurture it. But let’s be honest; your staff is there, primarily, because they want to make money. Is that really the motivator you want for people you’re paying to help you run a successful business? Do you want them counting down the hours until they can leave the office? Or do you want them to feel invested in your company, and that they’re part of something bigger than themselves?

If it’s the latter you want, you’ve got to establish a company culture. What makes working at your business a benefit to people? What ethos guides you? Are you a fun and quirky company with a foosball table in the break room? You don’t have to be to connect with your team, but you do have to have some sort of culture to serve as the glue that binds your team.

5.    You Can’t Handle Criticism

Like many entrepreneurs, you became the boss because you didn’t like taking orders from other people. Now, however, you refuse to see your own flaws and how they’re damaging your business. Your staff is afraid of you, and will never come to you with a suggestion on how to improve the company. And that’s your own fault.

Without your employees, you’re a solopreneur. And if you’ve built up your business enough, at some point, you won’t be able to be one-man (or woman) show anymore. Reaping the benefits of entrepreneurship doesn’t include being glued to your computer or office 24/7 after all, right? Take a long, hard look at how you lead your staff, then be open to improving your strategy.

6.    You Don’t Listen

You talk more than you listen, and you think you have that privilege because you’re the head honcho. But you’d be surprised what you can learn from your staff if you only listened, and allowed them to be honest with you. Being a better listener will make them feel like you value what they have to say, and they’ll open up in a way they didn’t before.

If you’re an interrupter, catch yourself before you start talking over other people. It belittles others, discourages honest communication, frustrates people, and shows you weren’t listening to begin with. Take a deep breath before talking, and don’t always feel like you have to fill silence with words.

7.    You Have No Interest in Niceties

Maybe your pet peeve is when everyone comes into the office and starts the early-morning chatter.

Hey Bob! How was your weekend?

I caught the last soccer match yesterday on TV. Can you believe they won?

Beth! That’s an adorable skirt! Where’d you get it?

Whether you subscribe to chit-chat or not, it’s got a place in the office, and you need to use it to your advantage. While you don’t need to make friends with your staff, you should be friendly and develop a positive relationship with each employee.

It might not seem like much, but when you say hello to one of your staff as you walk by, ask about their kids, or just show interest in them as human beings rather than cogs in your machine. They’ll develop a bond with you, and will be more willing to go the extra mile for you and your business.

Conclusion

Sucking as a leader, fortunately, is reversible if you’re willing to invest some time and energy into improving your management tactics and learning better communication strategies. Just set your ego aside, be open to what your staff has to say, and trust them to do their jobs. It’s a challenge for many new entrepreneurs, but a major stepping stone on the path to entrepreneurial success.