One of the many questions we get when we speak about venture capital financing is how it all works and how it affects a founder's (and potentially other owners') share of a business. You may have heard the terms "pre-money" and "post-money" thrown around and, beyond a basic understanding, wondered exactly what those terms meant.
Rather than trying to explain it here, I thought I would point to a great resource that I've run across and that does a good job of helping with this question in very real terms. The resource I am speaking about is one that I found through someone I met at the Kauffman Foundation - Bo Fishback, Vice President of Entrepreneurship. If you don't know Kauffman, they're the world's largest foundation devoted to entrepreneurism.
Bo's created a site that has a really cool simulator that allows you to put in your share of a business along with others' shares of your venture and then see what the effect an investment has throughout the first and subsequent rounds of funding. It's quite interesting and dramatic. Some might say it could scare you away from taking outside capital, but that really boils down to whether you feel you would be better off owning a smaller percentage of something with a greater chance for success or a greater percentage of something that has less of a chance because it is under-capitalized? I don't mean to imply that taking outside capital is any guarantee of success, but it certainly can be a major factor.
Please note on this tool that there are small question marks next to things like "convertible debt" and "down-round" protection, so be sure to check those out, as they give very concise explanations that are worth understanding.
Have fun with this tool that's easy to use and that I hope will be a great aid in helping you visualize what the effects of an investment might mean to your ownership position. If you like it, please pass it on!
John Dearborn is the Chief Development Officer of JumpStart and brings experience as an entrepreneur, founder and CEO at companies across the US and Europe over the last 25 years to the pursuit of economic transformation in Northeast Ohio.