I'm looking for an estimate of how much stake VC firms get in the very
early stages of financing.

The scenario I'm thinking about is a young web/IT startup in Silicon
Valley. They're still a couple of guys in a garage, already have a
working prototype, might already have taken some seed funding, and
need about $1 million to scale their business and hire some more
employees.

I realize this is highly dependent on the actual company and
negotiation. That's why I'm only looking for a *ballpark figure* of
how much stake they'll need to give up to get that $1 million.

You can respond by citing statistics or articles (off- or online).
Alternatively, if you're in the industry, you can respond with "the
number is X and I know it because I work for one of the top 10 VC
companies".

Thanks and let me know if you need more input,

Gabor

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Clarification of Question by gaborcselle-ga on 27 Dec 2005 03:07 PST

After reading tagawa's comment, I realized that I asked the question
the wrong way.

I realize that the individual company's first-round valuation,
funding, and the resulting VC stake depends on the individual company,
their business, the business plan, and negotiation.

What I'm looking for is *statistics* on first or early-round VC
funding. What's the average valuation? What's the average investment?
What's the average resulting stake?

For example, the San Jose Mercury news has quarterly lists of VC funding:
http://www.mercurynews.com/mld/mercurynews/news/13157231.htm
Understandably, this does not include valuations or stakes.

Has no academic or analyst ever surveyed the economics of the VC
industry? I'm sure there's a goldmine of statistics somewhere; I'm
hoping that someone here can help me find it.

The most common way to decide a VC's stake is by calculating the VC's
funding as a percentage/proportion of the company's pre-VC valuation. 
So if the company is valued at $5 million and the VC's funding is $1
million, then the VC's stake would be 20%.  Obviously this can vary
depending on the situation in question, but 10% to 50% seems to be the
normal range.  More details can be found at:

http://www.paulgraham.com/startupfunding.html
http://www.askdavetaylor.com/how_much_equity_does_a_vc_take_when_funding_a_startup.html
http://money.howstuffworks.com/question398.htm

If you follow this rule, the big question is how much is the company
worth now?  Unfortunately there is no easy way to answer this,
especially for startups with no revenue yet, but here are a couple of
links to give you some guidance:

http://www.lodgix.com/valuing_start_ups.htm
http://www.angel-investor-news.com/ART_acenet2.htm

Incidentally, the website http://www.paulgraham.com has a lot of
essays relating to technology startups, written by a VC.

Dear tagawa,

thanks for your comment and the links you included!

You're probably right in that I asked the question the wrong way,
since it's a combination of the pre-VC valuation and the VC funding
that determines the stake.

Still, doesn't the VC determine the pre-money valuation? Not entirely,
it seems: I really like your Angel Investor News link, which describes
the pre-money valuation as the sum of discounted net operating cash
flows.
But isn't that a very traditional way of valuing big, established
businesses, that have boringly predictable net cash flows? The numbers
on the business plan are seldom more than vague guesses.

After re-reading my question, it does sound a bit over-simplified.
I'll try to clarify.

Thanks again,

Gabor