D Own Your Venture Equity Simulator

Structuring relationships within the startup, calculating equity distribution, establishing valuation—these are among the most difficult steps in the evolution of every startup, and even minor mistakes can cause the startup to disintegrate. OwnYourVenture (http://www.ownyourventure.com) is a free equity simulator that you can use to simulate any number of “what if” scenarios involving the amount of investment, type and nature of investment, and resulting control. I recommend every startup work with OwnYourVenture to better understand the process.

The main benefit of OwnYourVenture is that it lets founders quickly understand how accepting different amounts of money in different ways will impact the ownership stake of the original owners. Some founders build elaborate spreadsheets for this purpose, but the OwnYourVenture equity simulator is much more visual.

Developed by OwnYourVenture, which advises entrepreneurs and early-stage companies, the equity simulator offers a user-friendly way to analyze how various deal terms impact the ownership of the company. On the left side of the screen are the “input” fields, such as the number of founders and premoney valuation (i.e., what the founders have put into the startup). The right column dynamically shows the results based on the input. In the center of the screen, a colorful pie chart visually summarizes the distribution of equity. As you make adjustments to inputs, you can quickly see how ownership shifts.

The equity simulator is especially useful because it forces founders to take into account the impact of future rounds of funding. Most founders are busy with the current round of funding and the details of running their companies. It’s hard to think about funding requirements down the road. Yet most startups go through two or three rounds of funding, and founders are often surprised (not in a good way) about the cumulative impact on their ownership stakes.

The tool also guides founders to distinguish between two options that many startups fail to model correctly: convertible debt and down-round protection. This is not the place to get into the details of term sheets, but for now, convertible debt represents a loan to the company that is paid back in equity instead of cash. Being able to model the preferential price that angels use to calculate the payback amount is very useful to founders. When angels have down-round protection, if the startup goes down in value, angels have the right to be “made whole” on future financing rounds.

Most startups set aside some equity for key employees yet to be hired. The equity simulator has an “option pool” feature that allows startups to reserve a percentage of the equity for that purpose.

Let me emphasize that no simulator can take the place of competent legal or financial advice, but it is an excellent way to test different scenarios and plan accordingly. The equity simulator makes understanding the impact of raising money for an early-stage venture transparent and easy to grasp.