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October 2017

Entries from October 2017.

October 30, 2017

What a Follow-On Reserve Is For

A venture fund rarely spends its whole commitment on the first check. Part of the capital is set aside for the rounds that come later, and that set-aside is the follow-on reserve.

The reserve exists because young companies raise in stages. A company that earns its next round will usually offer existing investors the chance to keep their place in it. Without a reserve, that chance expires unused.

Reserving too little forces a fund to watch its best holdings be diluted. Reserving too much leaves capital idle in companies that never call for it. The discipline lies in judging, round by round, which companies have earned another check.

A reserve is a plan, not a promise. It should be revisited every quarter and released when the reason for holding it has passed.

Reading a Capitalization Table

A capitalization table is the ledger of who owns a company. Founders, employees and investors each hold their share, and the table records every class of stock and every option beside its holder.

The useful reading is the fully diluted view. It counts not only the shares outstanding today but everything that could become a share: options granted, options still in the pool, warrants, and notes waiting to convert.

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