Why Your Equity Could be Worth Less Than You Think (Or Possibly Nothing at All)
The following article originally appeared in my regular column at Forbes.com:
Today’s post comes to you with the help of my friend Jeron Paul, of Scalar Analytics, who with his co-founder Matt Tillotsen explained to me some of the intricacies that investors and founders need to know and consider as they make or receive equity investment in their ventures.
As Forbes contributor Alan Hall noted in his recent column You Want How Much Ownership In My Business? the decision to give up equity in exchange for investment is one of the most critical (and emotion filled) choices an entrepreneur has to make. So here’s a bit of a tutorial from Jeron to help explain how the process works.
“Equity is often referred as a cake or a pie, and everyone wants a piece,” Jeron says. In the course of Jeron’s work as a Principal at a $400M venture capital firm, as a founder of Scalar Analytics (a valuation and analytics firm) and Scalar Capital (a private equity secondaries firm), and also from Capshare (an online cap table management system users can access free of charge from www.capshare.com), Jeron has gained a unique view of some of the most brilliant and some of the most destructive equity-related decisions to be made in venture capital and private equity.
Before getting too technical with me, Jeron began with a story:
The Greatest Venture Capital Deal Ever Made
Jeron recalls hearing Paul Maeder, a founder and General Partner of Highland Capital Partners, speak at a conference where he brilliantly and hilariously compared Christopher Columbus’ voyage to a venture capital deal. After failing to raise money from Portugal Ventures, France Ventures, and England Ventures, Christopher went to Spain Ventures (Ferdinand and Isabella) where he was also turned down because “his request for payment (one-tenth of all riches from the Indies and the rank of Admiral of the Ocean, Viceroy and Governor of the Indies) caused the sovereigns to flatly refuse the project.”
Fortunately, as the story goes, the crown’s treasurer, Luis de Santangel, was able to reverse the sovereigns’ decision, arguing that “investment was small considering the potential reward.” Columbus turned that funding into the greatest venture deal of all time. The New World made Spain into the richest country in the world and created the opportunity for the country where all of our recent venture successes such as Google and Apple exist.
To continue reading this article visit my Forbes.com column.