Ownership Structure
The Meaning of Ownership
There are five possible meanings of ownership:
- financial return,
- participation in local/operational decisions,
- influence in global/strategic decisions,
- a sense of community, and
- fairness.
The least popular of them is influence in global/strategic
decisions.
From the perspective of perception gaps,
the low discrepancy between managers and non-managers about
the importance of these items is a positive sign. Managers
and non-managers choose roughly the same importance rating
for each item, and they tend to rank order the five aspects
in almost the same way.
Within some companies, however, there
are sharp differences. At one client, managers feel that
financial return was the least important aspect of ownership;
non-managers feel that it is the most important one. But
on the whole, managers and non-managers seem to be starting
from roughly the same place when they think about ownership
in the abstract.
The business is owned jointly by the founder
members, investors and by the employees. However, the extent
to which they own the same differs from company to company.
But generally 30 to 35% of the company is held by the founder
members, another 25 to 30% is held by the investors (angel
investors as well as venture capitalists) and the rest is
owned by the employees other than the founder members.
Rights of the Investors
The extent of ownership is not fixed for
all the companies. How much stock the founders keep depends
largely on how much money they need to raise, how they plan
to structure that financing, the intrinsic value of the
business and what the long-term opportunities and upside
are. Initially, no passive investor should want to own a
majority of the business. The initial investment round should
never exceed 35 percent to 40 percent ownership of the company.
When it raises additional sums, it's a
reasonable goal to double or triple the valuation for each
round -- as long as it has been successful in meeting benchmarks
and the company is making significant progress. To demonstrate
the importance of increasing the valuation over time, as
it raises additional capital, for an example: If you raise
$2 million for 25 percent of the company on the first round
and you are successful at doubling your valuation on the
second round, you will only have to give 11 percent of the
company for the second $2 million.
Here is the calculation:
No matter what valuation one gets, keeping
a controlling ownership interest in one's company, over
the long term, should not be one's goal. Maximizing the
value of the entrepreneur's ownership is much more important.
Typically, after the second round of outside investment,
the founders will have given up voting control of the ownership.
At the time of a public offering, one should consider oneself
highly successful if the founders have retained 20 percent
of the company, 20 percent is in the hands of management,
and 60 percent are in the hands of outside investors.
Investors' Required
Share of Ownership
Various investors will require different
rates of return (IRR) for investments in different stages
of investment and will expect holding periods of various
lengths.
The investor's required share of return
is calculated as follows:
Future value of investment
Share of ownership required = --------------------------------------------
Future value of the company
The summary of the ranges of the annual
rates of return that venture capital investors seek on investments
in firms by stages of developments and how long they expect
to hold the investment is given below.
The extent to which properties and cash
will be used is decided by the board members. This varies
from one company to another.
There can exist various incentives like
ESOP for the employees to remain in the company. Employees
can be offered ESOP and in turn they become owners of the
organization. This involves them in various decision-making
programs of the company and also they feel like the owners
of the company. Managers in employee-ownership companies
tend to feel more like owners than non-managers do, and
the difference is substantial. Managers exercise more of
the rights of ownership, and they often own a larger portion
of the company stock.
The founder members cannot leave the organization
until either it reaches the IPO level or is sold out. Even
if the founder is forced out of the company, the company
is subject to pay the share held by him in the company.
Source: IndiaCo
