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Fred Wilson once again shows how you use equity to build great companies in his post on the story behind Geocities. It would make a great business plan resource case study if any business school ever gets interested in better understanding the way founders and VCs use equity to build great companies.
It is much easier for VCs to be “free” with equity (you know why?) and much more difficult for the entrepreneurs and founders to make the sacrifice. In the case of Geocities the key founder was already down in the teens of a holding. Fred Wilson and his partner offered the founder a large option pot of 10% if he took Fred’s money.
But as Fred always points out, VCs only do well if they back great founders who build a business. The good news from comments on the post is that the Internet boom of the late 90s is coming round again.
Too late to invest?
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Fascinating report that Innocent is mixing juices with Coca-Cola. The latter are investing £30million for between a 10% and 20% stake valuing Innocent at between £150million and £300million. I doubt that the founders of Innocent, three Cambridge University graduates, have been over generous with their option scheme so each will own around 20% of the company – you can do the maths. At the start there were four equal shareholders; the three graduates and one investor for £250k. So all has gone down very well.
You have to admire co-founder Richard Reed saying of Coca-Cola “they can help us get our products out to more people in more places. They have been in business for 120years, so there will be things we can learn from them and we may be able to influence their thinking too”. Modesty!
I wonder what business plan resource they have used to think through this massive step for Innocent? Bringing in a trade investor, let alone a brand as powerful as Coco-Cola will have a massive influence on the future of the company. It all depends on the shareholding and we will have to wait until the accounts and 363s are available to learn more of the structure. Of course, they may have followed the usual route of the high-tech companies and flipped to Delaware in which case all will be secret.
My comment on Fred Wilson’s post on Co-investors discussing the fact that most deals involve more than one VC. Fred stresses the importance of the people chemistry.
Bringing in another investor to re-value the company (upwards!) allows the existing investors to justify the higher price to their investors. It also widens the skills and contacts available to the founders. It is unusual for the existing investors to go for a “flat” round (why would they?) and it forces the founders to keep pushing out into the tough world of the market place. Who would ever wish to start-up and run an Active Equity Company?
In one of my investments (sorry, no names), the founders attracted offers from possible new investors who effectively underwrote the round at the higher valuation. The existing angels and staff fully subscribed the round. The “underwriters” did not receive a fee!
The round was complicated because the investors agreed to waive part of their entitlement to allow staff to subscribe for shares. This meant some complex maths to work out our entitlements and one angel disputed the workings and showed that there was a mistake in the third decimal point. Just another demand on the founders of an Active Equity Company and shows the need for a business plan resource.
In the existing market, companies are doing well to achieve a flat round – the same price as the previous round – so I hear. This is a disaster for the founders as any stalling in the capitalisation of a company can only signal problems ahead. In the current tough times, only the best will be demonstrating increased valuations so should an angel keep investing?
Philip Baddeley 10 hours ago
fredwilson
10 hours ago