question archive Suppose three engineers come to you with a plan for a disruptive, yet-to-be developed software program that seems compelling
Suppose three engineers come to you with a plan for a disruptive, yet-to-be developed software program that seems compelling
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Suppose three engineers come to you with a plan for a disruptive, yet-to-be developed software program that seems compelling. They are asking for $10 million, the amount they think they will need over the next three years to reach cash flow positive. They have a pitch deck that includes a proposed deal. They are offering you 25% of the company. The founders own the remaining 75%. You will buy common stock, and are entitled to one of four seats on the board of directors; they hold the other three seats. One slide in the deck contains a detailed prediction of the value of the company. If you invest $10 million, you will own shares that are worth at least $50 million at the end of the third year.
Suppose you decide to accept the deal. Many other venture firms are eager to invest, and it seems likely the entrepreneurs will get the terms they have offered.
Twelve months after you wire the $10 million, the CEO calls. The company is progressing nicely but Oracle has offered to buy it for $20 million. They intend to pay your firm $5.0 million in cash. The founders will be paid $15.0 million immediately for their shares and each founder has the potential to receive a $5.0 million bonus after one year." The founders have decided to accept the offer.
What valuation was paid in the acquisition? Why did Oracle structure the deal with a separate bonus for the founders?
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Answer:
Valuation paid = $20 million
As a startup company grows and as it takes on more investment, the need for more talent increases - and the ability to compete for the best talent is a must. One material factor that influences this ability to compete is the compensation package. Money. Stock. Bonus.
Explanation
As a startup company grows and as it takes on more investment, the need for more talent increases - and the ability to compete for the best talent is a must. One material factor that influences this ability to compete is the compensation package. Money. Stock. Bonus. It starts with the critical addition of engineers where competition is stiff across the land.
So management is pulled into the fray of revisiting executive comp or risk losing out on the candidates needed to take the company to the next level. This is typically when things start to change within the organization. And when executives and senior level personnel in other verticals get wind of the new compensation offerings, they demand equitable treatment.
So If this employer is a growing and scaling company, the implementation of a target bonus will happen and probably sooner than you may think.
