After a decade’s lull, the IPO is back, stoking dreams of entrepreneurs looking to cash out. Yes, dramatic market swings have changed some game plans recently, but in the first two quarters of 2011, 79 companies issued initial public offerings generating $24.3 billion, more than double the amount raised in the same period last year, according to PricewaterhouseCoopers. Often overlooked by newbies: By the time a company is ready to go public, the founders usually have diluted their personal ownership stakes considerably through previous financing rounds.
It is not uncommon for angel investors and venture capitalists to seek up to 40 percent of a startup’s equity each time entrepreneurs raise capital. Over the course of multiple rounds, total ownership by outside investors can climb to 75 percent. At the same time, to keep employees excited, another 20 percent of shares have to be set aside for an options pool on an undiluted basis. The combination of new investors and an expanded options pool is a double whammy, reducing the ownership of founders (and previous investors) even more. By the time the company is close to listing, founders will be lucky to retain five percent to 10 percent of the equity.
To read the full, original article click on this link: Don't Undercut Your Equity Stake - BusinessWeek
Author: Monica Mehta
