September 2016
Beginner
174 pages
3h 50m
English
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Chapter 3. Ownership and Valuations
Now that we’ve covered the basic principles of venture capital, it’s time to dive deeper into its mechanics.
Often entrepreneurs are intimidated by venture financing because of the intricacies of structuring a funding round. But the truth is that the mechanics of venture capital are actually quite straightforward: investors put money into your company in exchange for a percentage of ownership, or in some cases in exchange for debt.
This chapter will introduce you to how funding rounds actually work and arm you with the knowledge and confidence to hit the fundraising trail. We will cover ownership, how it’s calculated, and how it changes over time, and we will discuss different options you have when structuring a funding round.
Understanding Ownership
You know your company meets the criteria of a venture-fundable business and you’ve reviewed the risks and rewards of venture capital funding, but there is one important piece to understand before you decide that venture capital is right for you: ownership. As an entrepreneur you need to understand how it gets divided up, how it can change over time, and why it matters.
Company ownership is measured in terms of shares. Every company can have a different total number of shares, which is immaterial to the calculation of ownership. Shares get divided up among a company’s owners based on their percentage ownership, and this list of owners is known as a company’s shareholders.
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