How to distribute shares in an Internet start-up: Google

Investors do not generally disclose if they have shares, where and how many. Companies often use the entry of a new investor to publish a press release and get media presence. It is a good time to see who the investors are, where they invest and by how much, but there is an unwritten rule: never mention the pre-money value or the resulting stakes. Secrecy and shadows are important in these circles.

Google is a good case study because, as a result of its IPO in May 2004, it was forced to disclose partial information about shareholders and percentages to the US Securities and Exchange Commission (SEC). Moreover, its unquestionable success predicted fabulous returns, so many investors were unable to resist the temptation of boasting about their shares in the web’s star company. Its veil was lifted for once….

Founders – 31.3%

Key employees – 7.9%

Advisory Board – 0.68%

Not including investors or their representatives (see further below):

Investors – 25%

Silicon Valley venture capital firms, which invested 25 million each in 5 years:

Main Business Angels, which invested 1 million dollars among them:

  • Ram Shriram, former member of the executive team at Netscape and Amazon: 2.2%
  • Andy Bechtolsheim, founder of Sun Microsystems: 1.10% (estimated)
  • David R. Cheriton, Computer Science Professor at Stanford: 1.10% (estimated)
  • Undisclosed investors: 1.10% (estimated)

Undisclosed – 35%

This is where the research and facts end and where speculation begins. Everything mentioned so far totals 65%, so where is the other 35%? Below are some Google investors whose percentage is undisclosed:

  • Angel Investors Venture Fund: a failed investment fund despite Google’s success and the fact that it had contributions from famous people such as Tiger Woods, Shaquille O’Neal, Henry Kissinger, Arnold Schwarzenegger, Frank P. Quattrone, Marc Andreessen (founder of Netscape), Pierre M. Omidyar (founder of eBay), Shawn Fanning (founder of Napster) and Bill Joy (founder of Sun Microsystems).
  • Stanford University: the university where the founders of Google studied owns the PageRank technology. In exchange for the user license, Google gave it an undisclosed amount of shares (“a bit of stock“) and annually pays it royalties.
  • Yahoo!: In 2000-2001, Yahoo! used Google technology as its search engine. In that stage, Yahoo! invested 10 million dollars in Google in exchange for an undisclosed stake. (Google’s IPO must have left it with a bittersweet taste.)
  • AOL: In 2002, America Online (AOL), now Time Warner, reached an agreement with Google that enabled it to buy 2 million shares of Google (1% of the total) for 22 million dollars. They have probably exercised that option.

We assume that the undisclosed 35% is as follows: Angel Venture Fund (10%), Stanford University (5%), Yahoo (4%), AOL (1%), stock plan (4%), other members of the board and the advisory board (1%), other key employees (2%) and undisclosed investors (8%). The result is as follows (remember that this is just an assumption):

  • Founders: 31.3%
  • Key employees: 10%
  • Stock plan: 4%
  • Advisory Board: 1.7%
  • Investors: 53%

Conclusions: the risk of unreal expectations

This ends the series of posts on “How to distribute shares in an Internet start-up“. There is no (and there will never be any) single answer since the actual percentage will depend on the company, the perceived value of the collaborator/investor, the stage at where the company is, and your ability to negotiate. However, we detect certain correlation in the answers from Charlie Tillett, Guy Kawasaki, Brad Feld and the Google case. Using external objective criteria gives a very useful pattern for establishing realistic expectations for everyone and increasing the likelihood of an agreement.

An example of unreal expectations is an entrepreneur who wants to create a company with those characteristics and retain its control. This is practically impossible. Even the founders of Google had to decrease their share from 100% to 31,3%. Nevertheless, there are always some exceptions. A paradigm was eBay, which sought investors not for their money (it earned 400,000 dollars/month) but for obtaining a “seal of confidence”, which is theoretically provided by having an institutional investor and thus being able to hire a good CEO. When eBay was listed, the distribution was as follows (The Perfect Store, hardcover, page 150):

  • Founders – 70% (Pierre Omydiar 42% & Jeff Skoll 28%)
  • Key employees – 6.6% (Meg Whitman, CEO)
  • Investors – 21.5% (Benchmark Capital)

Another example of unreal expectations is the business angel that wants to support the “next eBay” and keep 50% of the company in exchange for its 250,000 euros, and the advisor who wants 15% of the company in exchange for its sporadic services. Both are asking for too much, so they are unlikely to reach an agreement.

In the case of Google, apart from the list of famous and rich people, the initial investors had also been successful entrepreneurs previously. History repeats itself: the founders not only reinvest their fortune in new projects but this culture also extends to their employees. I am not going to idealize them but it is clear that they have come up with the cake’s recipe and the exact weight of the ingredients: in terms of both percentages and efforts. Fairy tales aside, creating a giant like Google required talent, collaboration from many heavyweights with contacts, nearly 65 million dollars of investment, and fair profit-sharing. They all understand the mechanics of the cake, they contribute to the “virtuous cycle of Silicon Valley” and they have realistic expectations.

By David Blanco
Saved in: Entrepreneurs, Internet, Venture Capital | 3 comments » | 17 October 2006

3 comments in “How to distribute shares in an Internet start-up: Google”

Gravatar de Nick

18 October 2006 at 11:11 pm    

Hi Belen and David!
This is fantastic news. I see that it’s going ahead. Wait till I tell friends of mine both in Spain and elsewhere. That way we can post about the same thing without me having to badly translate for them!
There was something in the Spanish which I couldn’t quite get, but the English version explained it perfectly. Can’t wait till it gets official! Good luck!

Gravatar de David Blanco

David Blanco
18 October 2006 at 11:54 pm    

Hi Nick,
Yours is the first comment on Negonation Blog (English version) ever… an historic moment ;)

[...] Tomorrow: How to distribute shares in an Internet start-up: Google [...]

More posts in Negonation Blog