Five founders, who started a company in mid 90s, recently sold their company for $82.5 million. But the funny part is, they had to split $36,000 between themselves while venture capitalists took home the rest of the money. One of the five founders, was left with $99. Ironically, the startup was called Bloodhound Technologies!
The company was founded by Joseph Carsanaro and four others in the mid 90s. After raising two rounds of venture capital, the company faltered when the dotcom bubble burst. Carsanaro was ousted from the company by the board and the investors took control.
The company then recovered and was sold for $82.5 mn in 2011. When the money was split, the founders were left with all of $36,000.
In this case, it can be argued in favor of the investors that the company really grew under the investor regime. But this story, shared by Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at Ohio State University is a reminder to all founders on how important it is to secure future rights (and capital structure).
Such stories are all too familiar in the startup world and India is no exception. Indian founders often give away too much equity too early. At a recent industry event, Rahul Sood, the GM & Partner, Microsoft Ventures made this observation
Indian startups get put into a place where there is very little equity and incentive for them to go much further. So they think of a quick exit. We have an issue here where entrepreneurs are giving away too much equity.
Take for instance the $138 mn sale of redBus to Naspers. The most interesting debate after the sale was that the employees made very little money while investors made decent returns on their investment. The founders didn’t do too bad either. At the time of exit, the three founders of redBus held about 23% in the company while the rest was owned by the three investors SeedFund, Inventus and Helion.
The problem of giving away too much too early is that the founders are left with little incentive to carry on the good work. Secondly, it also hampers the ability of the company to raise capital in the future.
Some say that its better to own a small portion of a big company than to own a big portion of a company that went bust. It’s really a fine balance and circumstances play a big role in many cases. But hey, you’ve been warned.