A few days ago, the Google-AdMob acquisition inspired me to do some armchair analysis of the deal. M&A events of this magnitude can a great way for an entrepreneur to get some perspective on the oft-touted term “upside.”
The first thing the deal reminded me about is how rare it is for a company to get top-tier VC funding, let alone get acquired by Google – the undisputed king-of-the-hill dream acquirer for tech entrepreneurs right now. Today, I’m doing some pencil math for what such a rare event might mean financially to the team that braved a fast-paced “startup mode” at AdMob these last few years.
I start my math with the face that AdMob took $4mm in Series-A funding in late-2006. I’m willing to bet that this $4mm came at a $10mm post-money valuation given a strong VC firm preference to own 40% of a startup right out of the gate. (Send me note if you’re an entrepreneur who wants to know more about “pre-money”, “post-money”, “cap table” or other VC 101 concepts.)
So who got the other 60% in AdMob’s Series-A cap table? I don’t have any specific insight other than the fact that late-2006 is when we first starting getting VC interest at my Startup 2.0. We eventually met with 20 VC firms in Europe and got to verbal or written term sheet stage with a few. The terms of our actual Series-A investment have never been disclosed, but I can say that most of the interested VC’s wanted to see 40% of their initial cap table to themselves – with angel investors getting around 5% and a share pool for future employees at 20% – leaving 35% for me and my co-founder to divide among us as the two of us.
Obviously, this Series-A cap table got updated at least twice when they took Series-B ($15mm in August, 2007) and then Series-C investment ($12.5mm in January, 2009.) My guess is that this money came in for 25% equity on a $60mm post-money valuation for Series-B and 5-10% on a $125-250mm valuation for Series-C. I base these numbers on the growth that AdMob must have been seeing to be on their now-public near-$100mm annual revenue run rate.
These assumption mean a simple cap table (as viewed by Series-A VC, employees, founders, Series-B VC, Series-C VC) might be 30%-15%-30%-25% at Series-B and 27%-13.5%-27%-22.5%-10% at Series-C. But money in from VC’s is rarely “simple” and the venture investors (Series-A in particular) likely got protections like anti-dilution that can affect the cap table dramatically.
My best guess for how things ended-up is 33% (Series-A VC), 20% (Employees), 19.5% (Founders & Angels), 17.5% (Series-B VC) and 10% (Series-C VC.) With the acquisition at $750mm and around 125 employees, these percentages would mean:
- Founders & angels split $146mm before tax
- The Series-A VC gets $250mm on their $4mm investment in about 36 mos. (>60x)
- The Series-B VC returns $131.25mm on their $15mm in about 26 mos. (8.75x)
- The Series-C VC returns $75mm on 12.5mm in about 9 months (6x)
- Employees have $150mm in their share pool which, like the founders’ reverse vest, is probably awarded in increments over 48 months from hire date
I could, of course, be wildly off in my final cap table figures but the math is still useful to me. Most of all, I’m reminded why the Forbes® list of billionaires is only around 800 worldwide.
If you found a venture-backed company that sells for three-quarters of a billion dollars, you make around $75 million after tax and angel payouts if you’re solo; $37.5mm if you have a co-founder. I wouldn’t complain about an eight-figure bank account, but my first startup missed its peak acquisition window because I was convinced that a founder who only took out $30mm from a hot startup in the Web 1.0 days was a chump.
I’m also reminded that it is possible to bring meaningful wealth to the people who risk startup life to join entrepreneurs in the critical startup days. Even allotting more shares to CxO bigwigs, an early employee should still see an acquisition payout well north of $500k for 48 months of work (at the most.) Even assuming minimal startup-mode salaries until now, the average AdMob employee probably pocketed $750k over the last three years, assuming they stick around to ride-out their vest.
Lastly, I see proof that the rich get richer. VC participants in all three funding rounds did best of all from a financial standpoint. I’m not complaining, since I’ve been on the receiving end of a startup that couldn’t attract talent without some stabilizing cash in the bank.
What I am saying, though, is that entrepreneurs should watch for VC’s who only see dollar signs when they present a term sheet. A hot startup can be a pot of gold for a VC firm but it takes more than money. It takes a real team effort among founders, angels, entrepreneurs and critical early-stage employees to cross the finish line in AdMob style.
Congrats again to everyone involved with AdMob as it evolved for a rare and tremendous success.