MARTIN OMANDER: Hi.
Welcome to "Root Access," the show on GDL about startups.
My name is Martin Omander, and I work for
Google Developer Relations.
And today I'm joined by none other than Don Dodge, fellow
Googler, longtime investor and startup advocate.
Today we'll deal with some viewer questions, Don.
And, by the way, thank you all for your comments on YouTube.
Keep them coming.
We love the feedback.
Don, we recently ran an episode about how to get
funding and launch your startup where we
talked about ownership.
And Jacob Williams made a comment on that YouTube video
saying that the preferred stock split is to give one
third to each of the two co-founders, and then another
third to investors.
And that way, no one can dictate to the
others or make a coup.
Is that how it's usually done?
What are you actually seeing out there?
What do investors do?
DON DODGE: Well, I suppose that's one way to do it.
But if control is the issue, that's probably
not going to work.
First of all, as founders, you start
owning 100% of the company.
So as founders, you might have two founders or three
founders, and you divide up the founding stock in a way
that makes sense to you.
So maybe one founder gets 40%, and the other two founders get
30% each for 100%.
So you start that way.
Then, when you bring in investors, they are going to
say, all right, I'll give you $250,000 for 20% of the
company, or whatever.
You might get $500,000 for 20% of the company.
You don't know until you start talking to investors what that
valuation is going to be.
But over time, you get diluted by taking on additional
investment.
When a VC investor comes in, they will ask you to set up an
employee stock option pool.
That's typically 15% of the company, sometimes 10,
sometimes 20, but in that range, 10 to 20%.
So you set aside 10 to 20% of the
company for future employees.
So that's going to dilute you down from your initial
position of 30% or 40% down further.
MARTIN OMANDER: And dilute, so you mean actually new shares
are created.
DON DODGE: Right.
So let's say you start out with the company, and there's
1,000 shares.
And you give 400 shares to one founder and 300 shares to
another founder and 300 shares to the third founder.
So that's the 1,000 shares.
Then you bring in investors, and you create more shares.
So you sell a part of the company, and you create more
shares to do that.
Typically, the founders have founders' stock, and then
there's common stock and preferred stock.
So founders get founders' stock, employees get common
stock, investors get preferred stock.
So you create this new stock.
That creates more shares and dilutes your percentage
ownership every time you sell more shares.
MARTIN OMANDER: I see.
So do investors care about getting a controlling stake?
DON DODGE: Typical not, no.
Angel investors, they invest their money, and they care
about the valuation a little bit, and the team mostly, and
that kind of thing.
So they might put in $100,000 or $200,000.
And they care more about getting in early at a
reasonable low valuation and then helping you build a
company up to a level where you can go to VCs.
Venture capital investors tend to care more about percentage
ownership and not so much control, but percentage
ownership, and not for control reasons.
They care about it for return on their time.
Because it takes the same amount of time to make an
investment in a company where you control 5% of it as it
does to make that same investment where
you have 30% of it.
So they're going to invest their time and their money
where they have the most ownership percentage for the
return on their time, not so much because they get control
of the company.
MARTIN OMANDER: I see.
You mentioned on founders' stock, preferred stock, common
stock, are those just words that describe stock you give
out at different times, or do they actually work different
and/or have different legal implications?
DON DODGE: Yes, they are very different.
So founders' stock, if you're a founder, you get founders'
stock, and you own that 100%.
So it doesn't vest over four years or whatever.
So the two or three founders, they own 100% of
the company to start.
And their stock is fully vested and fully owned.
Common stock is typically given to employees in the form
of employee stock options, which vest over four years and
has a strike price.
So as employees come in, you give them common stock in the
form of employee stock options, and
it vests over time.
Preferred stock is for venture capital investors.
And it's called preferred because it has some preferred
provisions in the agreement that allows them to get their
money out first.
So they have preference over common stock
or founders' stock.
They get their money out first in the case of a liquidation
or bad event.
They might also have warrants or other types of preferences.
So, yes, there are three different types of stock, and
they're very different legally.
MARTIN OMANDER: I see.
Thank you very much, Don, for making that clear for us.
And thank you all for watching.
Please leave your comments and any questions you'd like us to
pick up in future episodes in the YouTube comments.
We really appreciate your feedback.
And finally, I am also a developer, and I love
developing on the Google Cloud Platform.
And as a special offer, we have a $2,000 credit that you
as "Root Access" viewers can access.
Please just follow the instructions on screen to sign
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Thank you very much.
See you next time.