How to allocate venture equity financing

From the beginning of the venture to the end of the listing, sum up every share change in the growth process of the startup company and see how this "share mosaic" changes. What kind of mystery is hidden in this?

Suppose 1: a startup needs to raise funds three times from an idea to listing;

Round a: confirmation mode;

Round b: developing replication mode;

Round C: Form a scale, become the industry leader, and meet the listing requirements.

Hypothesis 2: The development of the company needs to be constantly joined by elite soldiers, and the company should constantly take out shares to team members.

Hypothesis 3: Every time venture capital comes in, the company will dilute it by about 25-40%.

Hypothesis 4: the company's performance is developing well.

The valuation of each round of financing is doubled on the basis of the previous round of price, which is called premium, and the term of VC is Up round；; However, startups have ups and downs. Sometimes, the company's money is burned out, and its performance has not yet risen, and it is in urgent need of investment. Such a company has no weight at the negotiating table, and the other party is willing to invest, but the valuation is very low, even lower than the price of the last round. Entrepreneurs have no choice but to admit the discount and let new investors in. This situation is called Down round, which means "selling cheaply".

Let's look at BenQ's "femur":

How many shares should a startup issue when it opens? This is the first practical problem that many entrepreneurs encounter when setting up a company.

There is no standard answer to this question. It is suggested that the entrepreneurial team should start with about 65,438+00,000,000 shares. On this basis, after three times of financing and team options, the total number of shares of the company will reach 6,543.8+billion shares to 6,543.8+0.5 billion shares by the time of listing. If the share price at the time of listing is 8-65,438+00 yuan, the market value of the company is 8-65,438+.

There is another reason for setting the number of shares at 1000000, that is, when issuing options to employees in the future, 50,000 shares will be given to companies with a total number of shares of 1000000, and only 500 shares will be given to companies with a total number of shares of100000. Which is more attractive? ! Remember, give employees shares in the future, not percentages, but shares!

Original shareholder structure

Image source "Enterprise Art" WeChat official account

BenQ's company won the favor of VC with its excellent team and unique concept. A round of financing has reached $2.5 million, $3.5 million for premoney and $6 million for postmoney. A round of investors asked the original shareholders to agree to issue 15% option to the management team, and the company's employee stock ownership plan was implemented before the completion of A round of investment. Yellow standard VC gave a lot of money, and the team also accounted for nearly 60% of the company's shares. Really lucky.

The ownership structure of the company after the implementation of the employee stock ownership plan before the A round of investment.

Image source "Enterprise Art" WeChat official account

Generally speaking, VC will require the implementation of employee stock ownership plan before VC investment, so that VC can reduce dilution. However, we can't think that this is the selfishness of the A-round VC. You should know that before B-round VC comes in, it will also ask for another employee stock ownership plan, and then A-round VC will be diluted together with the founding shareholders.

How much should the employee's option ratio be left? There is no standard answer to this question, which is generally 5- 15%. The original shares of startups are precious, although they are of little value to many people.

The ownership structure of the company after the A round of investment (after the implementation of the employee stock ownership plan).

Image source "Enterprise Art" WeChat official account

As can be seen from the table, a round of financing has a lead investor and a follow-up VC. As the name implies, the lead VC is responsible for the negotiation, due diligence and legal documents of the whole project ... investing some money with the lead VC, but sometimes it is also a strategic step to get involved with the lead VC.

Even if several investors participate in this round of financing at the same time, some are leading investors and some are following investors, which can be regarded as a whole. They sign the same legal documents and enjoy the same interests and obligations. Alas, the biggest problem of startups is "uncertainty", especially "confirmation mode". You see, BenQ's company got the money, but after Round A came in, there was a bottleneck in management and business progress. Product testing often makes mistakes, and revenue does not come in as expected. Soon, the money from the A round of financing was burned out, while the B round of investment negotiations was delayed. Round B VC insists that the money before round B is $5 million (lower than that after round A), and round B VC invests $3 million. Postmoney is $8 million, and investors in Series B also ask for 10% option for the future team, while VC investment clauses in Series A stipulate that if the stock price is lower than Postmoney in Series B, VC in Series A will not be diluted (! ! ) ..... Enemy at the Gates, the company is in danger, and Huang Mark and his team have to make a decision and agree to the terms of the B round VC.

The ownership structure of the company after the B round of investment (after the implementation of the employee stock ownership plan)

Image source "Enterprise Art" WeChat official account

Thankfully, the company is also a fortune teller. The money of round B VC finally came in on the day when the money of round A was burned out, and the fragrance of the company continued! Please note that the preferred shares of Series A investors are now marked as "subordinated". This is the guild regulations. The last VC has the highest priority. The last round of VC is "secondary" priority, and the last round is "secondary". These priorities will take effect when the benefits occur. For example, if the company is going to be liquidated and the money for resale is broken, VC with the highest priority will take it first. If there are many, the second priority VC will take it, if there are many, the second VC will take it, and the last one will be the entrepreneur's; One more thing: The number of shares of investors in Round A in the above table is much higher than that in Round A, because Round A has the anti-dilution clause. In order to maintain the percentage of "share mosaic" in Round B, entrepreneurs either give some of their shares to Round A VC or let Round A VC get some shares at no cost. What is chosen here is the method of increasing the A-round VC shares at zero cost ... Think about it, entrepreneurs are at the forefront. Profit sharing is the last one and the first one to support the early VC of entrepreneurs. Similarly, the priority of profit sharing is also very low. On the contrary, VC that will come before IPO has the highest priority, waiting for peaches to eat. Well, maybe that's the reason. Few people are willing to support the early entrepreneurial team. Everyone wants to ride your IPO roller coaster. I hope these priorities will not produce groups of class enemies!

After the completion of round B financing, BenQ and his team learned from previous experience, adjusted their strategies and refocused. The new money has not been squandered, and it is time to make a move. It was all used in the blade, and the result was an instant hit! At this time, the venture capitalists finally saw the opportunity one by one. Everyone was willing to give money to support BenQ to make the company bigger quickly, so the company's board of directors decided to raise funds in the C round. After this round of financing, the company was almost ready to go public. The negotiation of the C round of financing was particularly smooth and the valuation was high. Six X's, that is, six times that of Post money in round B, raised $30 million with 48 million premoney (800 x 6 = 4,800). Of course, Series C investors also proposed to strengthen the core listing team, such as introducing CFO and vice president of sales ... option pool increased by 5%.

The ownership structure of the company after the C round of investment (after the implementation of the employee stock ownership plan).

Image source "Enterprise Art" WeChat official account

BenQ company is even more powerful because of its tested excellent team, clear goals and sufficient capital. The IPO listing plan is put on the agenda, the listing place and underwriters are selected, and the itinerary and strategy of the roadshow are determined. Alas, thriving companies are refreshing, not to mention a large number of millionaires will emerge after the company goes public ... Let's calculate their worth and see how thick their wallets will be in the future.

Equity structure of initial public offering

Image source "Enterprise Art" WeChat official account

Have you noticed that when the company went public, the priority of the company's shares was cancelled and everyone became "common stock"? Because the company is listed, there is no need to guard against those risks during the start-up period. What venture capitalists want to do is to cash out as soon as possible, take off old clothes and throw them into the secondary market for investors to wear.

See, starting a business is good. BenQ, Liu Fang and Zhou Yang are all worth tens of millions of dollars. It's all settled in this life, so you don't have to worry about eating and drinking anymore! However, if BenQ's team hadn't stumbled in Round B, and several ribs had not been bitten off alive by Round A and Round B VC, their value might have doubled now ... Anyway, BenQ is still a good man. Let's learn from him!

Some supplementary notes:

1. It is difficult to estimate the enterprise value of early startups. Venture capital only calculates a few figures according to the shareholding ratio and investment amount, and it can't explain how much the company is really "worth". But the shares of early companies are very valuable, and entrepreneurs should cherish them.

2. The growth of startups is reflected in the appreciation of stock prices. The faster the appreciation, the less dilution when financing. Of course, companies can save money carefully, and the less financing times, the smaller the dilution. For example, 30,000 yuan was spent at the beginning of the venture, which is almost equivalent to 1% of the company's shares. 30,000 yuan after the C round is less than 0.000005%. So, don't burn money, don't look for VC, it's best not to look for it. Entrepreneur's bones should be hard!

3. The valuation of the above IPO is simplified, without considering the company's income and profit scale.

4. The equity of the startup company is not circulated before listing, and the valuation is unclear. There is no market price. If percentage is used when giving shares to employees, no one can tell the 25%, 15%, 1%, 0. 1% ... the number of shares given to them. Whether you give 500, 5000 or 50000 shares, you can advise others to think about it: If the stock price of the company is 10 yuan when it goes public, you can know how much these shares were worth at that time by simple calculation.

5. As mentioned above, "dragging in with VC is a strategic step", explaining that early VC investment, like starting a business, should not be stopped. As long as the company can survive, there is hope. Therefore, an important task of early VC is to introduce the next round of VC into the company.

Maybe you think that after burning all the money in round A VC, you can let round A VC smash some more, right? No, VC has to pay again this time. It's not that simple. VC can't give you another sum of money just because you run out of money. That's illegal! Specifically, if I voted for the A round and I set the valuation for this round, then I can't price the B round myself and then invest a sum of money. I have to find a new third party to lead the bid. I can't get the b round investment, but I can follow. This is the rule of VC industry. Otherwise, I can set the price of Round A at 5 million, Round B 10 to 50 million, and Round C 10 to 500 million ... This is an "internal transaction" and does not represent the "market price" of this company. Therefore, every round of financing invested by VC must be approved by a new third-party VC.

First, because of the "constant fragrance", and second, because of the "pricing power" of future financing, I will lay the groundwork in the A round, ask a VC to invest some money and buy a ticket to watch your performance with me. If you play well, the ticket price for the next scene may be decided by this VC, and I can easily vote with you and then watch you continue to perform.

Key points of M&A equity investment due diligence industry

1, the traditional manufacturing industry focuses on: land, real estate compliance, environmental compliance issues, dealer issues, and the payment of social security provident fund for employee labor dispatch. Land and real estate compliance is critical. For example, the government attracts investment, and in order to allow enterprises to come in as soon as possible, it promises that enterprises can start construction before obtaining land certificates. However, the Ministry of Land and Resources has aerial photography, but the land bidding, auction and hanging have not been done, and there is no land certificate. The factory has been established. If it is aerial photography, it will be subject to administrative punishment. Some companies are stupid. The local land and resources bureau said that I would fine you 1 10,000 yuan first and then refund it to you. You have nothing to lose. However, IPO is not feasible. This is a major administrative penalty, and the declaration period needs to be directly extended for 2 to 3 years.

2. Pay attention to agriculture: financial standardization, land for agricultural facilities, suppliers and seasonal employment. The hardest hit area of financial fraud. Tax incentives are strong, and the tax cost of financial fraud is low. The proportion of cash transactions is large, and financial verification is not easy. It is difficult to count the inventory, such as 1 0,000 mu of trees, and the workload is huge. Problems of agricultural land use. Basic agricultural enterprises will encounter the problem that farmland has no title certificate. This is the key to check the ownership of the occupied land and the nature of land use. It would be very troublesome to occupy basic farmland. In addition, we should also pay attention to the circulation of agricultural land. At present, farmers' awareness of rights protection is getting stronger and stronger, and it will become a substantial obstacle if it involves group time.

3. Focus on real estate, gardens and architecture: qualification affiliation, labor subcontracting, project subcontracting and project bidding. The problem of qualification affiliation. People often wonder if there are any qualified methods, such as labor subcontracting and labor dispatch. However, the biggest problem of qualification is that the gross profit margin is not allowed. The gross profit margin of normal business may be 30%~50%, and the gross profit margin of related business is only 10%. As a result, there are a large proportion of qualifications in the reporting period, which simply cannot withstand financial verification and can only be postponed.

4. New energy and environmental protection industries focus on franchising, industry access and subsidies. Policy dividends are crucial. Driven by subsidies, the industry is prone to overheating, which is of particular concern to everyone.

5. Cultural media industry focuses on: copyright issues, joint investment legal issues, policy risks-lack of regulatory laws. Copyright issues. Good Voice of China and China's new songs are typical copyright disputes. There was a copyright lawsuit before the release of Wolf Warriors, and the key of copyright to the cultural media industry is self-evident.

6. The Internet industry focuses on privacy issues in the context of big data and intellectual property issues brought about by software copyright. Many startups and apps are outsourced. People usually don't pay attention to it. Does the outsourcing agreement stipulate who owns the intellectual property rights of technology development? Is there an agreement that outsourcing companies need to keep company information confidential? There are also risks such as user data leakage. Enterprises are at different stages, and the problems they should pay attention to should also be different.

So in practice, in what way will we conduct due diligence? Generally speaking, we will use the following methods:

1. Look for legal issues from the cross-checking relationship of existing materials, such as whether the land and real estate information recorded in the industrial and commercial archives are consistent with the company's existing real estate? Is there any mention of capital occupation in the notes to the capital verification report? Do historical shareholders have potential related parties?

2. Buy the appropriate big data service and inquire through the Internet.

3. Can you find some administrative penalties by visiting government departments?

4. Transfer funds, focusing on financial authenticity.

5. Check the original and key copies.

For example, we check the land and real estate of an investment project. You can't take it for granted that there will be no problem when you see the property right certificate. It is best to check how the land and real estate were acquired, whether they were transferred or sold, and whether the purchase price has been paid. In some companies, the real estate license is likely to be forged. You'd better go to the local real estate authority to inquire about the relevant property rights, or you can check whether there is a mortgage on the property.