Rules Of Thumbs

In recent years (following the bubble of the late 90’s) it has taken new ventures an average of 6.5 years to reach a profitable exit via a liquidity event (acquisition or IPO)

Private equity funds (including venture captial funds) are typically structured to be “self-liquidating”.  This means that they dissolve at a pre-determined time, which is typically 10-12 years after its founding.  However, if the fund is not fully invested and/or liquidated by the pre-determined time, the Limited Partners generally grant an extension to the General Partners.

On average start-up new ventures will require $68 million in financing to reach cash flow positive.  This capital is typically raised over 4 rounds.  Once the new venture reaches cash flow positive, in theory, it should be self-sufficient thus not requiring any further investment. 

• When incorporating a new venture, a good rule of thumb is to authorize (or issue) 10 million shares @ 1/10 of cent. 50% of these shares should be issued to the founders (with a vesting schedule). 10% should be set aside for future employees. The remaining 40% will go to future investors.

• Also, ALWAYS elect to “pay” taxes on any shares immediately, even if they will vest over time. This way you will not have to pay any income tax on the difference of the value of the shares at time of receipt and their market value at that time.

A rule of thumb for how much you should have when you retire is to have 20 times your expected expenses in retirement.

A rule of thumb for how much you should save is about 10% of your take-home pay…if you start early enough. If you are over 40 and haven’t accumulated a sizeable nest egg, you should try and increase this amount to 30%. This rule of thumb should help you build an emergency fund, save for a house, etc.

A rule of thumb for how much house you can afford is that you should try and keep the purchase price of the house less than 2.5 times your GROSS annual income. (Good luck in San Francisco, New York, or basically anywhere you’d want to live

A rule of thumb for mortgage payments and mortgage size is that every $200,000 borrowed, your monthly mortgage payment will be $1,000. This rule of thumb is loosely based on a 5% mortgage rate and a 30-year mortgage.

A good rule of thumb for estimating how long it will take for anything growing at a compound rate to double is to divide 70 by the annual growth rate as a percentage.

For example, if you wanted to know how long it would take for the value of you home to double, and you estimate that its value will increase by 5% per year, simply divide 70 by 5, which equals 14. So, if your home value appreciates 5% for year in 14 years it will be worth twice what is today.

Alternatively, this rule can be used to figure a growth rate. For example, if you know that it costs twice as much to go to the movies today as it did 10 years ago, you can divide 70 by 10 years, which equals 7. So, on average, movie ticket prices increase by 7% per year for the past 10 years.

A good rule of thumb regarding equity ownership in your company is to institute a vesting schedule on stock grants. This has numerous benefits the two primary being:

1. Better terms than the vesting schedule a VC will impose on you…and they will impose a vesting schedule on you.
2. Helps eliminate problems and costs associated with individuals leaving the firm with equity before a liquidity event.

The rule of thumb for vesting time horizon is a 1 year cliff followed by straightline monthly vesting.