I am often asked “What will the first round of VC money cost me? So today I’ll share what I have found during a recent campaign for a couple of startups.
In a nutshell, “A Rounds from respected VCs will cost you
about 25% of your company.” There is typically a range around that 25% of plus
or minus 5%. And the 25% can become 50% to 60% in some cases. VC’s do not all
price their money the same way as their competitors.
Are you confused? Well let’s help you get unconfused.
- The first round of cash from outside investors is named the Seed Round. For a Bootstrap startup, it comes from your personal bank account. For classical new enterprises, it can come from a motley crew, from various sources. Often they are supplied by angels (wealthy individuals) or the infamous FFF: Family Friends and Fools. Some top tier VC firms do Seed Rounds, but they are in the minority.
- Seed Rounds are typically less than $2 million, most often in the range $0.5 to $1.5 million.
- The “A Round” can be the first round of capital from investors. Then it is referred to as the “Seed Round.” But the Seed Round can be followed by an A Round. So first get the definitions of your rounds straight. And then decide on what you are looking for.
- Half the VCs I have spoken to during September to December, 2006 have said their typical A Round will cost the company close to 25 percent of the company’s shares. In VC language, the post-money ownership ends up with a quarter of the shares owned by the investors.
- The A Round is typically used to finance the construction of the first product. The Seed Round is typically used to complete a detailed business plan that includes how to build the first product.
- The size of the A Round is most often around $3 million, give or take a million or two. If your bplan calls for more than that to finish your first product, you will have to do that with a B Round. That is a tricky round to close on if your first product is on schedule (rarely) but not completed (half pregnant).
- The B Round is typically double the size of the A Round. Unless you ran into trouble and need the B Round because you ran out of money. Then the rough times start and you know why venture capitalists are notoriously dubbed vulture capitalists (a term I think is not appropriately applied to the good VCs).
- The B Round is typically priced per share at double or more the price of the A Round. If you are able to succeed with spectacular results (finished critical hiring, building the product and securing some great customers) as cash from the A Round nears its end, you can look to increase in the prices for your B Round shares by a lot more than doubling them.
- Be careful to think and plan your first three rounds of financing. For instance, I have been told recently of several in the $100 million amounts that followed typical A Rounds that had cost the company around half their company for the large ($6 - $10 million) A Round.
plan your rounds of financing (pricing them), the secret trick it to work
backward. Start at the IPO and work back, year by year, to the Seed Round.
That’s a quick introduction. I hope it helped you. More can
be found in my books, including details about share for employees (options).
BOTTOM LINE: Find help when pricing your rounds of capital. Ask other CEOs. Find a great lawyer. CPAs can be helpful. And simply ask the VCs in advance: they will tell you what they expect in the kind of round you are looking for. They know that the VC money is competing intensely for good deals (like yours) and that other VCs know what the going market is (valuations of companies) for venture capital. If you get the pricing of your rounds planned and executed well, you’ll have enough to go around for everyone you need to be a winner. That can be a powerful addition to your unfair advantage.