| I believe investors aim at ownership percentages at Series A mainly for pro-rata. Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata. Take 2 pretend funds:
CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round. Rocketship Corp. will have the following rounds (super simplified): Series A @ $25M post-money Series B @ $100M post-money (15% dilution) Series C @ $600M post-money (10% dilution) Series D @ $3B post-money (5% dilution) Series E @ $5B post-money (5% dilution) Exit @ $9B CoolVC would have exited with $1.8B + spent $100M (profit $1.7B)
CheapVC would have exited with $900M + spent $50M (profit $850M) In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC. In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside. Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans). |