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14 Mar

David, the problem with determining Founder’s ROI is that most people have stars in their eyes and never calculate their ROI. Or if they do, it isn’t well thought out and it is outlandish.

David Cummings on Startups

Recently I was talking with a friend of mine who was thinking about raising money for his startup. He’s self-funded the business to date but is finding out that it’s going to take twice as long and cost twice as much to reach break-even. The topic of dilution and how much to sell came up, prompting me to introduce the concept of return on founder equity that I learned from a different friend.

Return on equity, as defined by Investopedia:

Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

So, the return on founder equity can be thought of as the amount of money the founder made relative to the amount of money the founder invested in the business. As an example, say you invest $5,000 and turn it into $1,000,000,000 like the Spanx founder did, you’d have a return…

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Posted by on March 14, 2012 in Business, Entrepenuers

 

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