Brad Feld on capitalizing a company

Brad Feld (who is an investor in and board member of FeedBurner) has a great post today about capitalization strategies for growing companies. I’ve never been much of a financial whiz (cue punch line: “That’s why he went to law school!”), but having gone through one IPO, a stock split in a privately-held company, and joined two start-ups (one boot-strapped and one venture-backed), this info both rings true and is invaluable for future reference. I’ll quote just a snippet, his post is a response to an e-mail question:

At my company, we’re looking at recapitalizing from 3.5 million shares to 35 million (and contemplating 350 million). … I asked my attorney what his recommendation is, but I’d love a second opinion. Do we stay at 3.5m, do we go to 35m, do we go to 350m?

My general rule of thumb for a venture backed company is to try to establish a share base from the beginning so that you never have to do a forward or reverse stock split (referred to in the question as “recapitalizing from 3.5m shares to 35m shares – or a 10:1 split.)”  A range of 10m to 50m shares – depending on what you think your exit value will be (the more optimistic you are, the more shares you should use) – is a good range to work with.

A really rich discussion of a company’s options ensues; read the whole post for all of it. Brad concludes by writing:

Overall, I believe that increasing the share count in a company to create the perception that an employee is “getting more shares” is a mistake.  I recommend you pick a realistic share count (again – my 10m – 50m range is a decent rule of thumb) so that – unless you have down round financings – you’ll never have to monkey with the share amounts in any scenario. Then – when you grant options to a new employee – explain clearly to them what they are getting. [Feld Thoughts]

Couple take-aways from this: first, the guy who e-mailed Brad out of the blue just got an insanely good amount of free advice. That’s a good lesson for anyone looking for input from a pro: sometimes, asking is all you need to do. Second, if you’re someone like Brad — sharing that info is very helpful to those of us in the trenches who don’t always see the various moving parts of the larger financing picture. Unlike the realtors that Levitt and Dubner write about in Freakonomics, Brad’s perfectly willing to be transparent with this kind of info — and it’s not just that he’s a nice guy: you don’t think other entrepreneurs are out there, looking at the number of financing options they have, and taking into account what kind of VC each individual is?

Bottom line: if you’re an entrepreneur who wants to better understand how investors see your business, a subscription to Brad’s feed should be top on your list.

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