The Share of Shares to Share by Szymon Janiak


The post was originally published in Polish on Szymon’s LinkedIn profile. Szymon kindly agreed to republish what we think is of great value to our readers.

Unpopular thought: how much % of the company should be covered by an investment fund? As much as they agreed with the founders, the rest should not be talked about.

Szymon Janiak, Co-Founder and Managing Partner at Czysta3.VC

Percentages are quite controversial. We can often hear that someone has taken up too many shares. But what does this mean in practice? With classic VC, you cover from a few to about 25% in the first round. Why? Because certain standards have been adopted, including that in the A round, the founders should still have a majority. Without it, other funds will not invest – because there will be no room for them. However, this case applies only to situations when someone actually wants to raise capital from round to round. And this is where the arguments end.

Because a company may want:

  • finance itself with debt
  • obtain grants
  • develop with its own capital
  • otherwise have nothing to do with VC

Then, this % has no impact on the company’s development except for motivation! The most important thing is what the company plans to do next. And this alone should determine the mentioned %.

The second issue is the market. In Poland, most VC funds are public-private. Each of them creates their own investment policy. Since we have a free market, everyone can price the risk as they want. If someone doesn’t like it – they just go to the competition. But what if the fund still includes high packages and has a queue of applicants, and its companies are doing great? Apparently this model works, so who cares about the details? Someone wants to attack entrepreneurs because they have too high margins? It reeks with socialist economy… 

Perhaps, when the money is public, the regulator should set the conditions by announcing competitions? Yes! A large number did so, allowing their funds to take up to 49.99% of the shares. So there is some sanity behind it.

The third issue is the bias of the described approach. It is assumed that the fund is a big bad wolf and the founder is Little Red Riding Hood. The truth is that I have seen many times that the founder is more experienced than the fund. In practice, there will usually be a couple of dreamers here. It is not a relationship between a poor needy one and a rich exploiter. These are 2 equal entrepreneurs who make free decisions.

The fourth issue is the lack of reverse optics. If an experienced startup founder scams business angels and other novice investors and sells them shares, valuing them dozens of times more than they are worth, how come no one stigmatizes that? Hypocrisy?

The fifth issue is the importance of naming. We are moving away from the orthodox. More and more private equity is taking minority stakes, and yet they should only have controlling stakes. It’s possible to seek out investment vehicles with such unusual strategies that they don’t fit into any existing canon. So maybe it’s a naming problem?

Recently, I saw a great example of using a founder. The fund took 50% and contributed so much to the company that after 1 year the shareholders paid out almost 5 million in dividends. Poor oppressed people… 

The comment section had to add:

A charlatan startup gets stigmatized in the same way as a charlatan investor – the first will never receive an investment again, the second will never take up shares in a good company again. One of the main tasks of a VC investor is due diligence. Investing at the right valuation is supposed to be the result of a proper understanding of the industry and building a network of specialists who support such a decision. Taking up 40%+ shares ‘because what if the company is worth nothing, at least I’ll have more nothing’ is a curious investment strategy. Fortunately, bad investments are verified by the market and for most VCs such a strategy is not necessary.

Further, the VC financing model is based on the assumption that the investor provides the company with initial or development capital (and not the only cheque necessary for survival). If an investor is interested in acquiring a (near) majority stake, then he should set up a bank and offer proper loans without hiding behind a VC model. A dilution of 40%+ in a pre- or seed round makes it impossible to obtain another round of financing or requires costly recapitalization, acting to the detriment of both the investor and the entrepreneur.

Aleksandra Pedraszewska, AI Safety at ElevenLabs

What is important is what the company intends to do next, but also what is the risk that these intentions will fail and what is the plan B. Do companies and investors estimate this risk in practice? Unlike the risk that the product will not work out, which everyone remembers to estimate.

Wojciech Gołębiowski, Head of Space Tech at EXATEL

I will ask the question: Isn’t the lack of a plan B in the form of an additional round of financing a red flag for investors? For me, the lack of a potential additional round in the founder’s plans is like saying ‘I have no competition’ – it shows short-sightedness and lack of immunity to black swans.

I believe that the Founder vs Investor approach is wrong. Both parties should care about the investment – the founder wants to make their dreams come true, and the investor wants to make money.

If we start dividing at the very beginning – it does not bode well.

Kuba Sieczka, Co-Founder at HEROS Motorcycles


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