With much fanfare Techcrunch announced that Christopher Poole, known as “Moot” to his buddies, received $625,000 in funding (that is 625 thousand, not, as you would be excused to have misunderstood, 6.25 million). Techcrunch can’t hold back its excitement: “Poole has revealed the names of the investors in the round, which are impressive to say the least. The investors are Ron Conway, Marc Andreessen, Chris Dixon, Kenneth Lerer, and Joshua Schachter.”
So let’s run some assumptions and see if that sounds like a good deal for Moot. Apparently these five gentlemen are heavy hitter VCs, so I would guess they are getting a 10% equity interest each in what will be called “canv.as”. That brings us to a round 50% of the company, leaving Moot with the other half.
Let’s further assume for now that Moot will be able to sell the company in 5 years to Google for $5 million. Round numbers, yes, but given the praise Moot is getting (Chris Dixon via Twitter: “Can’t think of anyone who deserves funding more than moot. Smartest digital thinkers I’ve ever heard”), this assumption should be realistic. We have a wundermoot here. So under these assumptions, Moot will walk away with $2.5 million and each VC will walk away with $500,000. Make a mental note.
Now let’s assume Moot could get a loan from a local bank. I think nowadays this is a realistic assumption: The pressure on banks from the Obama administration to give small business loans is immense. Bank of America regularly takes out full-page adds to show how many of such loans they have recently made. The Small Business Administration does nothing else all day but dole out loans of this magnitude (minitude?). So let’s just assume Moot could persuade a bank to give him a $625,000 loan. Of course finding an Angel for such a loan might also be realistic.
Sounds old school, right? “I’m backed by [insert impressive VC name]” definitely sounds much sexier than “we are working with Citibank”. Yes, VCs have brand-names. Chris Dixon, for example, is working hard on promoting his own brand against more established names.
OK, so back to the numbers. If Moot gets a loan at a 7% interest rate, then he will have to dole out $43,750 in interest a year for a combined $218,750 over five years. When Google pays the $5 million purchase price to Moot in five years, he will have to pay the $625,000 principal back to the bank. After that, he would be left with $4,156,250 for himself. If he can get a loan only at a whopping 10%, then he would still walk away from the Google deal with $4,062,500 just for himself.
So no. Under these assumptions Moot got a terrible deal from his VCs. But if any of my assumptions seem unrealistic, then please let me know!