FOUNDERS’ EQUITY AND VENTURE CAPITAL

15/01/2020 Suresh Bhagavatula

TAKEAWAYS EQUITY
EXERCISE
 Reflecting on the Exercise

 What was challenging about this exercise?

 Period 1
 How many of you gave yourself more than 50%? Kiran/Madhu?
 Cognitive Bias: Your mind tends to inflate your own contribution and the time you’ve
spent on something.
 How many exactly 50-50?
 How many less than 50%?
 Period 2
 How many of you couldn’t make a deal? What happened?
 Is there anyone else who would have agreed to this?
 Find the cofounder for whom it works
 Who still went for 50-50 even in period 2?
 Those who had unequal splits, what criteria did you use to decide?
Reflecting on the Exercise
 What did you learn?
 Splits?
 Pre
 Post
 Changed?
 Deal/ No deal
Why is equity important to understand?

 Most high-growth ventures grow through equity

partnerships. That means equity deals get
structured and restructured in a variety of ways as
the venture evolves into a stable corporation-
whether public or private
Why is equity important to understand?

 At the same time, most new ventures fail NOT due

to bad management, slow market uptake or lack of
cash, but because relationships between founding
partners and other equity partners become
conflicted and impossible to repair
Why is equity important to understand?

 Hence the paradox of equity. You need to share

equity to build an enduring high-growth venture.
But sharing equity without understanding how
increases the probability of the venture breaking up
and failing
Equity
 What is equity?
 Control/ Decision Rights
 Compensation/ Incentives
 Profit Sharing
 Ownership
 What is ownership?
 Residual risk and rewards
 Equity is an instrument that deals with the
uncertainties of ownership
Equity
 What is equity?
 Control/ Decision Rights
 Compensation/ Incentives
 Profit Sharing
 Ownership
 What is ownership?
 Residual risk and rewards
 Equity is an instrument that deals with the
uncertainties of ownership
Equity
 What is equity?
 Control/ Decision Rights
 Compensation/ Incentives
 Profit Sharing
 Ownership
 What is ownership?
 Residual risk and rewards
 Equity is an instrument that deals with the
uncertainties of ownership
Equity
 What is equity?
 Control/ Decision Rights
 Compensation/ Incentives
 Profit Sharing
 Ownership
 What is ownership?
 Residual risk and rewards
 Equity is an instrument that deals with the
uncertainties of ownership
Finally…
 Irrespective of how you split equity, the leader
should run the partnership as though everyone is
equal and has real “emotional” ownership in the
firm as a whole.
 Negotiate all three details (compensation, decision
rights and profit sharing) plus equity very carefully
and choose a leader – i.e. don’t set it up as an equal
partnership. But if you are the leader, run the
partnership as though everyone is an equal partner.
VENTURE CAPITAL AND PRIVATE
EQUITY
- AN INTRODUCTION
(SOURCE: PROF. G. SABARINATHAN, IIMB)
Venture Capital and Private Equity

 What is VC
 Who participates
 What do VCs do
 Venture Capital as Intermediation

-Dollars
-Monitoring
Investment Interest -Consulting
FUND $$$$$$$$ VC FUNDS INVESTEE
INVESTORS FIRMS
Returns Capital Appreciation
 Private Equity Market : Participants and Flows

Pension Funds
New Ventures
Endowments -Dollars
-Monitoring
Foundations Dollars -Consulting Expansion
Financial LP Interest VC Fund Restructuring
Institutions Returns
Returns
HNI / F Ownership
Changes
Non-fin corps
Other Investors
 Venture Capital as Intermediation

 Limited Life Discipline

 Funding / Abandonment Option
 Proprietary Network
 Neutrality
 Added Value / Experience

-Dollars
-Monitoring
LP Interest -Consulting
FUND $$$$$$$$ VC FUNDS INVESTEE
INVESTORS FIRMS
Returns Capital Appreciation

 Managing Uncertainty and Risk

 Filling Resource Gaps
 Mitigating
 Moral Hazard
 Agency Conflict
 Information Asymmetry
 Reducing Search & Information Costs
 VC Investment Process Overview Exit

Post-Funding

Contracting

Valuation
Effort

Deal Structuring

Deal Evaluation /
Due Diligence

Deal Screening

Deal Sourcing

Time
 VC Investment Process Overview Exit

Post-Funding

Contracting

Valuation
Effort

Post Financing
Deal Structuring

Deal Evaluation /
Due Diligence
Deal Evaluation
Deal Screening

Pre Evaluation
Deal Sourcing

Time
What is venture capital?
 Key messages
 VC works within definitional and structural boundaries
 Not suitable for every type of venture and at every stage of the
venture (nascent to scale up)
 Comes into play once ‘uncertainties’ surrounding a venture are
reduced to ‘risks’ through actions of the entrepreneur
 VC has helped in creating some great companies
 Not every venture that succeeded got VC and not every VC
funded venture succeeded
 VC comes as a package – the entrepreneur exchanges ‘decision
making freedom and flexibility’ for assured capital - voluntarily
Thank You

Questions References

 Presentation by Prof.
Saras Sarasvathy, Prof
K Kumar, Prof.
Srivardhini K Jha,
Prof. Dalhia Mani and
Prof. G. Sabarinathan

21