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How Startup Funding Works

How Startup Funding Works


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Anna Vital from Founders and Founders explains how a startup can go from an idea to an IPO in the infograph, “How Startup Funding Works.” Have $15,000 and an idea? You can start your own company! Don’t want all the responsibility? Find a co-founder and you can split the work 50/50. Then, find some family and friends to invest for cheap before anyone else has a chance to set your idea in motion. This is also a good time to make an option pool and set aside stock for your future employees.

Next up: the seed round. You have found accredited angel investors to give you their own money, and even though your percentage of the company has dropped to around 31% , your $15,000 has turned into $200,000!

Then you find venture capitalists – people who have persuaded other people to put money into his or her fund during Series A — the first really significant round of venture funding. The VC now has 33.3% and you and your partner each have 19.2, but your company is now valued at $4 million. It is also the time to hire your first employees — they take a chance on your growing company by accepting a low salary and some stock.

After several more series of funding, investment bankers complete your Initial Public Offering paperwork and sell a lot of your stock. Finally, when your company does the IPO, anyone in the world can become an investor. You end up with 17.6% of the company, but your slice of the pie is now worth around $458 million. And as ­­Vital says: “100% of nothing is a lot less than 17 percent of a big company.”

CC_HOW STARTUP FUNDING WORKS

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About the author: Claire Carter

Claire graduated from the University of Maine in 2012 with a degree in journalism and a minor in English. She was a copy editor and reporter for her school newspaper, The Maine Campus, and The Working Waterfront, the third largest paper in Maine. She currently lives on the island of Vinalhaven.

  • http://www.farrstdevelopments.blogspot.com/ Stewart Farr

    Wow that is the best explanation I have seen thus far. Well done Funders and Founders!

  • Todd Craw

    If the company is valued at 2.6B going public, I think the following is several orders of magnitude wrong: ” 17.6% of the company, but your slice of the pie is now worth around $2.3 million” – seems like it is actually worth around 457M

  • Pingback: How Startup Funding Works | Marketing_me | Scoo...

  • http://www.customer-rivet.com/ Sid Heroor

    A very simplified approach to funding but it does explain the process in an easy to understand way. The key takeaway that its better to have a small percent of a large pie than a big percent of a small pie is something worth thinking about. However, just funding and equity dilution isn’t important. A good Angel/VC also work with you, advise you, and open doors for you. They need to work for the money too!

  • Grant Allen

    I want to know how the rich uncle invests early, owns 5% and only dilutes to 2.4% after the company raises ‘some more series of funding’ and then floats $235 million on NASDAQ! Sounds like a great deal!

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