David Cummings posted a sample scenario tonight walking through numbers for an angel investor wishing to maintain a 1% stake in a seed investment through several rounds of fundraising. The point is that maintaining a percentage investment requires a lot of follow-on capital.
I like to really understand the numbers so as I read his post I created a spreadsheet to see how it all works. My spreadsheet is here.
Out of curiosity, I ran numbers for the other option which is to stop at the original investment, rather than attempting to maintain the percentage ownership level at 1%. The numbers came out to be as follows:
Option 1: Maintain 1% ownership
- Exit with $2.5M at 1% of the $250M exit price
- Total invested dollars is $405k
- Multiplier is 6.17X
Option 2: Stop after initial $25k investment
- Exit with $788k at 0.32% of the $250M exit price
- Total invested dollars is $25k
- Multiplier is 31.50X
Of course the highest returns come on the earliest and most risky dollars, so these numbers make sense. In option 1, the incremental risk of the later stage investment dollars is much less than the original $25k investment.
What are your thoughts on angel investing? Which option would you prefer if you were angel investing?
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