Palantir, which is oft credited with helping the U.S. government track down the terrorist and alleged September 11 mastermind Osama Bin Laden, is now one of the most valuable private companies in the world. It's also lumped in with other so-called super unicorns such as Uber, Airbnb, and Snapchat. Silicon Valley investor and luminary Peter Thiel is one of Palantir's founders and early investors.
But just how much will the original founders see of that money, assuming an initial public offering, or some other exit event? Not as much as you might think. With each round of financing, ownership becomes more and more diluted, financial experts say. And that's particularly true with software companies, which depend on highly paid engineers who are likely to expect stock ownership as part of their hiring packages.
Even by the third round, founders and senior executives can be left with less than an aggregate 18 percent ownership, finance experts say. By later rounds, as the company’s valuation goes up and it presumably has access to other sources of revenue from sales, executives would be selling off less of the company.
"It would not be surprising at all that only a fractional ownership interest remained after three tranches [of financing]," says Bruce Bingham, managing director of the strategic advisory Berkeley Research Group, and a valuation expert. In other words, by your Series C round, you should expect to own very little of the company you started.
Palantir has reportedly pulled in cash in 15 rounds since 2011. Some of its biggest investors include the Founders Fund and In-Q-Tel, the venture capital arm of the Central Intelligence Agency. Even though later rounds in companies with increasing values tend to take less ownership, Palantir's large number of fund raises is likely to leave the founders and the current CEO with relatively small amounts of ownership. And that’s the case, even if the founders count among them Thiel, one of the savviest tech investors around, valuation experts said.
By a Series C round, founders who serve as chief executives could have as little as 15 percent ownership, and frequently much less, says Drew Nordlicht, partner and managing director of Hightower Advisors, San Diego, an Inc. 5000 company. The firm manages $25 billion in assets for venture capitalists, private equity fund managers, chief executives, and entrepreneurs who founded companies that went public or received private equity funding.
Chief executives who are not founders are likely to have as little as 3 percent of the companies they lead. Anything less than 3 percent, and the company risks losing its chief executive to a more lucrative opportunity, Nordlicht says.
As a reality check, by the time Twitter went public in late 2013, its co-founder Jack Dorsey owned 4.9 percent of the company. Dick Costolo, who was not a company founder but served as its chief executive, owned 1.9 percent of Twitter. Co-founder Evan Williams, who did not have an executive role at the time, owned 12 percent of the company, according to Twitter’s IPO filing with the Securities and Exchange Commission.
So, for Alex Karp, who co-founded Palantir and currently acts as its CEO, that could amount to a staggering $3 billion at the top range. But that's likely to be way too high an estimate. A Forbes article from 2013 indicates Thiel owned about 10 percent of the company, and Karp slightly less than that two years ago. Although a Palantir spokesperson was unavailable to confirm those details, that means Thiel's stake could be worth $2 billion, while Karp's take, assuming an 8 percent ownership stake, would be roughly $1.6 billion. Given the additional fund raises since then, it's likely these percentages are still smaller today.
Meanwhile, other co-founders with executive roles, such as Nathan Gettings, who serves as company’s chief technology officer, and Stephen Cohen, an external vice president and director, could have as little as 1.5 percent ownership, financing experts say, which would still leave both with a tidy $300 million each.
Not bad for a day’s work, or rather, a decade’s worth of time building a fast-growth company in a new industry.