Founder ownership and capital efficiency

Founders always care about ownership, sometimes a bit too much and often for the wrong reason. The good reason to care about ownership would be to align one's own interest with that of the investors, to stay motivated. The bad reason would be for pure control – or worse – ego rationales.

The evolution of founders' ownership throughout the fundraising rounds is a function of capital efficiency.

The more efficient the founders could use the VC money in generating growth and turn operational-cash-flow positive as early as possible, the higher the capital efficiency and the larger the ownership of the founders. Vice versa.

Sammy Abdullah of Blossom Street Ventures did us a great favor by compiling the S-1 forms of prominent startups that went IPO and the founder ownership upon IPO.

In the table he neatly compiled, we found that high ownerships upon IPO include famous examples such as Facebook (57%), Amazon (47%), LinkedIn (21%), eBay (42%), Google (51%), SalesForce (32%), Atlassian (37%), etc.

However, they also include less glamorous examples – by the standard of hot internet deals – such as GoPro, where Nick Woodman held 43% upon IPO.

I am also surprised by James Breyer of Etsy, who still held 25% of the shares upon IPO. Considering that it took Etsy more than 10 years to go IPO, such a high ownership could only be possible due to multiple years of bootstrapping or lower growths for long periods – less needed VC money for working capital – without digging into the company's history.

Some low ownership figures might surprise readers less familiar with the mechanism of dilution would be:

  • Twitter (2%)
  • Pandora (3%)
  • Box (4%)

Pandora probably spent too much on content rights and its infra was also created at the time cloud was just gaining traction. Box is actually famously capital inefficient as a cloud storage company as they went for enterprise markets, which require heavy investments in sales forces and expenditures in short-term sales costs.

Grabbing Dick Costolo's 2% ownership of Twitter upon IPO from their S-1 was probably a data mistake by Mr. Abdullah – the co-founders of Twitter are well known to be Jack Dorsey and Evan Williams. Dick Costolo was hired as a CEO in 2011 prior to IPO.

In all cases, keep in mind that if control is not an issue, i.e. if you have good VCs who trust you and who are on your side, founders should not be too obsessed by their percentage ownerships. It's the values of such ownerships that count.

It’s always better to own 0.1% of Facebook upon IPO than owning 80% of your own SaaS startup that is nowhere near an exit.
— Anyone in this industry

Don't believe in me? When Facebook hit IPO in 2012, the 1st-day market cap was more than $100B. 0.1% of that is $100M.

What kind of capital should hardware founders look for?

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