Startup Equity - Valuation Vs Exit

LS Subramanian, CEO, NISE

The young startup founder was in cloud nine as his share of the startup equity he had asked for was given to him. He was now on the road to become a millionaire and the team worked again hard in making their startup an outstanding success.
I met the young startup founder and asked him what was his share of equity, he told me that he got the highest after the principal founder who retained 51% for himself, kept about 40% for potential VC investors and distributed 9%, he was one among the nine who got 1% equity in the company.

He was overjoyed because the company was expected to be valued at 100 million and he would be a millionaire once this valuation was achieved. I told him this was wonderful that they expected a valuation of such magnitude and I asked him how he planned to cash his 1 percent.

He looked at me quizzically, who is this old fool asking stupid questions to a future millionaire. I had to patiently ask him what would happen if he left the company before it reached the proposed valuation, he did not have the answer, so I asked him to check with his promoters.

The next day he came with the answer- he would still retain the 1 percent, it was his forever. I asked him how would he cash his 1 percent, he was a minority shareholder and he may never have the option to cash in his equity before the majority share holders had cashed in. Also his 1 percent gave him no say in any deal the majority shareholders made.

I had to patiently explain to him that the equity was Mickey Mouse money  until he could get real cash for it which would most probably happen only when the majority shareholders planned to sell the equity after their achieved their expected valuation.

I advised him that the 1 percent equity was a hook to retain him in the company and it was not even worth its face value until he found someone willing to buy it and again that would need to the nod of the principal shareholder to transfer it as he was the majority shareholder.

I asked him whether the principal promoter was paying him the market value for his services, he told me that he was offering his services as sweat equity for the 1 percent equity, though he did get a small sustenance allowance.
I told him that he may want to seek his real value in terms of money which was worth its weight in gold today rather than a futuristic minuscule equity which was based on the expected valuation of the promoter.

Are you also a minority equity recipient in a startup company with Mickey Mouse money in the form of equity?

Maybe it is time for you to do a reality check and make sure that the cash hits your bank account for your value today.

There is no harm in accepting equity after you have been paid your full market worth, there is a remote possibility that Mickey Mouse money may come alive someday like the characters in Disney's magic kingdom. Until then you will be banking on a miracle and magic in becoming a millionaire while your savings get depleted to sustain yourself to compensate your sweat equity.

Be aware there is a world of difference between the face or projected value of equity versus the realized value on exit. All the best to your dreams of becoming a millionaire.

- The author , L S Subramanian, is CEO of NISE.  LS (as he is called) is also a respected thought leader known for his innovation in information technology for business. He is the architect of the OTC Exchange of India, India’s first online trading national stock exchange and has advised NCDEX, Power Exchange, CRISIL, Exchange Next  and other companies in trading solutions and processes.  He can be reached at lssubramanian@niseindia.com

Other articles by L S Subramanian

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Why India needs to build 100 new smart cities from the ground up

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