You ask a start-up CEO why he started a venture and he’ll probably tell you “to satisfy his inner calling” and it is true as many start-up CEOs leave high paying jobs to start something that they always wanted to do. But a little money hurts no one and especially a start-up. So how does a start-up CEO earn money by doing what they always wanted. Let’s take a look
This is the stage when the CEO has epiphany of his inner calling and an idea is born. He works on that idea researching and gathering every piece of insight that can be valuable to him on his way to quenching his thirst of excellence. The CEO is likely to become poor than rich at this stage as he may have to leave his job spend money on all the research and travelling that need to be done. He is sole owner of his enterprise till now.
This is the stage when you realise you cannot do all the work alone and having a helping hand who can help you with your idea will be beneficial. Hence you ask a competent person with suitable technical skills to become co-founder of your company. But he will not work for free and you don’t have money to pay his salary. Therefore, he agrees to take up 50% of the shares in lieu of all the work that he will do. You still have 50% of the company.
FRIENDS AND FAMILY
Once all the technical things are done and your product is ready to raid the markets, you’ll need to advertise your product so that people can know of the master piece that you have created. But you have no money. So you ask you family and friends to lend you money. Someone in your family agrees but he too demands a piece of the pie. Hence your uncle takes 5% of the equity and you are left 47.5% of the stock along with your co-founder.
Your company starts well and attracts user. You are doing well and want to expand and reach further markets to increase your market share. But as always you still don’t have the money to do it so you approach an Angel investor who agrees to put in $100k in your company but asks for 10% of the stock. Turns out he wasn’t so angelic as you thought he was. You agree and is left with 42.7% of the stock.
The strategy is going so well and your company’s growth is skyrocketing so you don’t want to take your foot off the paddle but as always you don’t have the gas money to drive this car o yours. Enters the Venture capitalists who are willing to invest $1 million in your company for 25% of the stock in the company. Now you are left with 32% of the stock
Your product has taken the market by storm but there is nothing new that you have done for some time. So you decide to improve your product and offer more services to your ever growing base but your co-founder is not enough to take on this responsibility. You decide to hire employees and that too the best one but they don’t come cheap. So you offer them 5% stake along with low salary. They agree and you again have 30% of the stock.
You and your company have truly made it big and you have decided to take your company public. You hire an investment bank who will discharge this duty of launching your company’s IPO in the market and selling a lot of your stock in return of 7% of the total stock. You have now approx. 25% of the stock.
Once the IPO is launched, anyone with a De-mat account will be able to buy and sell your stock. So will your Co-founder, your uncle, your Angel investor and your VC.
This might come to you as a little disheartening to see your share getting reduced to 25% all the way from 100% but what is more important to note here is that those 100% stock were worth nothing and this 25% shares are worth millions. A lot nothing is far better than a little of something.