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The Hamburger Test

So… you and your co-founder have a great idea, you've built a business plan around it, lined up some people you trust as the first few employees and are out raising money. Right now you and your co-founder are the only shareholders and between you, own 100% of the stock.

Raising money for a company, whether from angels or VCs, requires that you ultimately sell stock in the company – equity – in exchange for a cash investment into the company. The challenge is how the equity gets priced.

As the founders of the company, you have a view of what its worth based on your idea and your passion. The investor will have their own idea of valuation based on their experience assessing dozens of different business opportunities and their risk/reward objectives. There's almost an iron-clad guarantee that the valuations will be different.

Of course, an investment only gets made when you and the investor agree on a price – the willing buyer and willing seller model of a transaction. The moment the investment closes, you are no longer the only shareholders in the company and you no longer own 100% of the stock – you have been diluted.

I see a lot of companies and their management teams get hung up about dilution. Believe me, after the initial investment, your investors are as sensitive to dilution as you are! Everyone's interests are the same – build value in the company and be able to raise the next round of investment at a better (higher!) price.

When the time for the next round of investment arrives, everyone is focused on the price – how much of an increase can you get in the valuation? It's an important question – dilution in this round will be a function of the progress you've made and how much more money you need to get to break even (and independence from selling more equity or taking debt to keep growing).

But purely focusing on the short term dilution is missing the point… You are still holding an illiquid security – there's no market on which you can trade your shares. Your real focus should be on a future liquidity event – what could the company be worth then? Focus on building the business and doing what it takes to grow – that's the best way to build value.

Whenever folks get hung up on interim valuations I use the Hamburger Test:

"Which would you rather own? 100% of a Hamburger stand on Woodside Road or 1% of MacDonalds?"

Think about it – briefly!

The key message is not to get caught up in short term optimization and risk the bigger objective. The only real valuation that matters is the one where you get liquid or ultimately sell your shares. Don't short change the potential by getting overly hung up on the near term valuation.


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Intense Brit, lived in Silicon Valley since 1984. Avid pilot, like digital photography, ham radio and a bunch of other stuff. Official Geek.

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