60% dilution at Series A? I don't think so. Typical is 20-30%, afaik.

its a guess. they received Series A in a very early stage, just out of the oven of YC's (may '08)

Even so, giving up percentage is like giving blood. I don't know of any founder who would ever willingly part with 60% of the company - particularly if it's doing well! The only people who give up 60% of a company are the poor guys on dragon's den...

This, and also competent VC's (and Heroku's VCs are top-notch) don't want much more than a third of the company in a single round, as it makes it far too difficult for the company to raise capital that it may need in later rounds.

Your math is just backwards. You have left them with what's taken away, rather than what they keep. A 1M on 2M pre deal would leave the founders with 66%, not 33%.

Is that really how much VC dilutes you?

From 94 > 37% series A is incredible, and ending up with 12.5%.

I wouldn't exactly be crying into my beer today if I was them, but I have to wonder if VC was worth it vs building organically for a few more years.

Especially when they are all Amazon based etc. Where did the money go?

No, the premoney in each stage is too low to be credible.

Generally a venture round will be for between 33% and 20% of the company, trending lower as the company gets further along. 25% is a pretty typical number.

If you assume each of Heroku's two rounds were for 25% of the company, then 94% -> 70.5% after the A -> 52.9% after the B. (It seems counterintuitive to sell 25% of the company twice but end up with more than 50% of it, but this is because the Series B dilutes the Series A as well as the common.) The premoney valuations implied for the A & the B would be $9MM and $30MM respectively.

The reality would be lower, because this doesn't take into consideration things like option plans. If we assume they created a 10% option pool before the A and then used it all, the dilution looks more like this:

94% -> 84.6% (options) -> 63.4% (A) -> 47.5% (B)

Of course these things can still vary pretty widely. But no one's doing $10MM on $5MM premoney unless something has gone pretty wrong. In that case I'd expect the management team to get topped up with additional options to keep them motivated.

As an aside, the calculation of who made what also assumes that the investors have no pro-rata rights, which is wrong. When a company raises $10MM in a Series B, not all $10MM comes from the Series B investor.

A 33% per-round dilution would be much more sensible (and more common). In the right fundraising environment this might even be 20% or 25%, but 33% is the right default assumption if you have no information.

Another hidden variable is the presence of liquidation preferences for VCs. Some funding agreements allow VC's to "double-dip", ie take their liquidation preference and then also take their full percentage of the leftover amount. However, with YC advising them and with the Heroku founders having a reputation inside YC as being good fundraisers, I think there's no way Heroku's VC's got this.

If you assume no double-dipping, a 33% dilution per round, a YC-average 6% stake in Heroku, and an average amount per YC startup of $20K, YC's share of Heroku is enough to pay for their investment in every YC company ever up until this point, and also all the companies in the next two batches assuming they are the same size as the most recent (and largest ever) batch. Anything they eventually get from Dropbox, AirBnB, etc would be pure profit.

That is a problem with the YC model in that they can't (or don't) fill follow-on rounds and are thus diluted.

Most VCs that invest in an A will set aside 3-4x that to invest in later rounds (Fred Wilson wrote a post about this recently)

(ps. your pre values are way too low (the 3 at A was probably on 10) but the point of dilution still applies. They also would have sliced out a 20-30% option pool at A)

Ignition, the lead in the final round, has stated that they made over $50m on the deal, so probably triple that valuation - $10M was on a $25-40m range.

http://www.techflash.com/seattle/2010/12/ignition-backed-her...

> $3M Series A (mid 2008) Assuming a $2M pre-money

> $10M Series B (2010) Assuming a $5M pre-money

I know this was just a thought exercise, but shouldn't their valuation have increased between 2008 and 2010?

Yes, you are right. If we assume an increase of the value of $3M between 2008-2010, then a pre-money of $8M in Series B, then the Heroku share would be 20.9% and pg's 1.3%. pg's multiple is 162x.

s/pg/yc/g

Thanks for the clarification. I was wondering whether PG invests outside of YC if he likes a team more than his cofounders do.