At a conference junket a few weeks ago, I had the pleasure of sitting next to a bright young developer (are there any other kind?) on a bus ride back from an event. Let’s call him Dave for ease reference.
When I asked Dave what he did he told me he was an application developer for Something-as-a-Service but his real passion was working on his phone app start-up that he and a couple of friends were doing on the weekends.
Dave gave me a brief overview of what the app would do. I’m not going to describe it here, but I “got it” and the concept sounded fairly interesting. Dave then mentioned they were at the stage of looking for some investment capital. Here’s an excerpt of what followed:
Me: “That’s great! How much are you initially looking for?”
Dave: “Um, I don’t know, one of my other partners is the money guy. He’s being handling the investor pitches.”
Me: “Well, what are your projections for break even on app? Do you know how you’d scale up once you landed capital?”
Dave: “uh, um…”
As you might imagine, Dave hightailed it off the bus upon arrival. Maybe I scared him, and rightly so. Being a partner in a venture and not having any ideas of the financials you need to grow and build equity in the company (and your share of it) is a dangerous oversight.
Dave would probably want to know when he could quit his day job and focus on his start-up full time, not to mention how much an investor share would nibble at his founder’s percentage.
At the point you’re getting serious about forming a company, or joining in as early stage employees (even if you’re not the money guy), creating a few forecast scenarios or taking a look at the ones presented to investors let’s you see what you’re getting into.
My advice to Dave is, talk to his money guy and hit Google for any number of simplified spreadsheets which will show him what he gains to lose.
What do you think? How does understanding your company’s equity – and your portion of it, shape your decisions (or not)?