Internet Billionaires to Entrepreneurs: Hold Your Equity

Do you think all it takes to become a successful Internet billionaire is a good idea and a strong business? You may be wrong.

In a recent review of initial public offering filings for Internet start-ups, it reflected Zynga and Zillow (NASDAQ:Z) did something additional to see personal financial success: they did not sell their company equity before their I.P.O.’s, according to a New York Times article.

This next generation of entrepreneurs listened to their Silicon Valley elders and took their advice to wait and sell.

Difference in the multi-billion dollar range can come from whether an entrepreneur obtains venture capital at the start of the business, at a high price. With the newly-found financing, a company founder may sell part of the company to the venture capitalist at a low price.

This financier can sit on this and then reap the benefits if a company goes public.

What an entrepreneur does early in his business may affect his worth later on.

Groupon (NASDAQ:GRPN) may be an example of what not to do.

In the case of Groupon’s I.P.O, Andrew Mason, the company’s CEO and founder, he received $1 million from venture capitalist Eric Lefkofsky.

After Groupon’s daily deal business took off, it needed more financing and set the company’s value at $3.87 billion. This number meant Mason owned 7.5 percent of Group but Lefkofsky owned 21. 5 percent ($3.2 billion), according to Capital IQ.

Zynga was a different story.

Created by Mark Pincus in 2007, he received $10 million in financing the following year thanks to three venture capital firms. The company sold stock during three additional finance rounds, placing the company at $10 billion. Pincus now owns about 19 percent of the company as it nears its I.P.O.

He’ll end up with billions.

Zillow Inc.’s  (NASDAQ:Z) co-founders Richard Barton and Lloyd Frink also saw similar success thanks to their financing. After its July I.P.O, the two owned approximately 41 percent of  the company. It now has a market capitalization of $800 million.

Sometimes an entrepreneur with a great, successful idea will grab financing from venture capitalist to keep the dream alive. They have to keep in the back of their mind, that company success won’t always put as much money as desired in their banks accounts should they decide to sell their equity sooner than later.

It could be the difference between millions and billions.