Disclaimer: There is a lot of supposition, and then extrapolation on top, in this article. It’s pinch of salt time.
So Tumblr is worth $1.1b dollars in cash. My god.
The outcome for Tumblr is amazing, they closed a cash sale even though they were unable to produce significant revenue from their enormous number of users and had a large team of 175 as at the date of sale. All this with the money potentially running out in a few months.
Now whether it is or it isn’t a good deal, or a sign of the SV apocalypse, is immaterial to this next exercise. Let’s undertake in some relatively wild guesswork to see how the founders made out and explore dilution on the way.
Let’s say Tumblr has behaved in a way typical of VC-backed companies, but has done very well in terms of valuation due to its ‘hotness’ (at least when valuations are talked about). Let’s say they start with 1 million founding shares.
A lot of my data is from Tumblr’s Crunchbase and various googling.
19 Oct 2007
Let’s also say they allocate another 10% as an ESOP (Employee Share Option Plan)
So the maths are:
1,000,000 + 100,000 + 250,000 = 1,350,000 shares
11 Dec 2008
The valuations for the Series B are not reported as widely as the initial raise, the only mention I could find was the supposition of Peter Kafka, at the link above.
Notably, TechCrunch did report the valuations for the Series A, D & E rounds, although these values are not in any press release they were obviously leaked as they were impressive!
So the maths again:
1.35m x 4.5/15 = 405,000 new shares issued
1,350,000 + 405,000 = 1,755,000 shares
20 April 2010
Now this is an interesting period. Tumblr is growing like a weed, but the terms of the $5m inside round (existing investors only) at Series C are not revealed anywhere I can find. This likely means this is a bridging round to the next investment which comes only six months later.
If the Tumblr story was a tale of super awesome progress, each round would have resulted in less shares being issued to the investors in each round, but I suspect that wasn’t the case given that the lack of valuation information.
Let’s say (so we can lowball) the valuation only moved up to 20 million. It’s likely however given the growth of Tumblr it was in excess of this.
1,755,000 x 5/20 = 438,750 new shares issued
1,755,000 + 438,750 = 2,193,750 shares
If there was no movement in the valuation and this was a true bridge, we’ll likely never know. It’s possible given the investors are the same, it may even have been done on the terms on the series B round for speed.
12 Nov 2010
This is where Tumblr’s valuation starts being more public as they start to shop themselves around for sale. ;-)
2,193,750 × 25/135 = 406,250 new shares issued
2,193,750 + 406,250 = 2,600,000 shares
This SEC filing from December 2010 seems to show that $3m was taken off the table by C-level executives by the end of 2010.
It’s possible some of the founding shares were sold in the 2010 Series C/D financing, particularly if the Series C was more of a bridge.
26 Nov 2011
The size of Tumblr means it’s on it’s way to either IPO or seek acquisition in short order, particularly as it is still not generating any real revenue.
2,600,000 × 85/800 = 276,250 new shares issued
2,600,000 + 276,250 = 2,876,250 shares
Sale! So this means what?
In a simple, unreal, world
Founders shares started with 1,000,000. Total shares now 2,876,250. The numbers aren’t important here, but the proportion is.
$1,100m x 1 / 2.87625 = $382m
A More Real World
This is unlikely however as the Series E round is likely to have a 2-3x liquidation preference, and potentially the Series D round as well, meaning they get their money back twice or three times before the cash is split amongst the founders.
So assuming a 3x preference at Series E and a 2x at Series D…
1,100m - 255m (3 x 85) for the 276,250 shares at Series E leaves $845m.
$845m x 1 / 2.6 = $325m for the founders
This presumes that the 2x preference at Series D doesn’t need to be invoked due to the increase in valuation.
Bottom Line for the Founders
The founders, if, big if, they held on to all their shares during this process would be sitting on a pile of cash worth just over $300m.
Incidentally, co-founder Marco Arment, left Tumblr in September of 2010 having likely completed his (standard) 4 year vesting period, but according to his own answer on Quora he still has a financial stake.
Yet tweets from Marco show that he was just an employee, meaning David Karp will hold the vast majority, if not all, of the founding shares: thus the $300m. Marco will have some proportion of the Employee Options or possibly some special side deal, and thus despite his contribution and risk taking won’t see the same upside. Aside: technical people know your value!
Newsflash for budding entrepreneurs
Firstly, a lot of this is supposition.
Secondly, Tumblr (and previously Instagram) are the complete outliers in ‘financial success by acquisition’, so I’m sorry, this isn’t going to be your life. But it’s interesting to have a look though right?
Thanks to Michael Smith & James Chan for having a read through of this prior to publication.