Reserves and ownership targets

Funds do not spray $100M across 100 equal checks. They write an initial check to get into a company, and they set aside reserves — capital to follow on in later rounds so ownership does not get crushed as the company raises. Ownership at exit is what can return the fund.

The big idea

A season ticket that you keep renewing is the picture. The first ticket gets you in. If you skip later seasons, your seat shrinks as the stadium sells more seats. The analogy breaks because you do not have to follow on — you choose which companies still deserve the reserved money.

A common pattern for a $100M fund: about 25–30 core positions. Average total capital per winner path might be $3–5M including follow-ons, with many small losers getting only the first check. Ownership targets at entry are often in the 10–20% range for lead seed / Series A investors (fully diluted conventions vary). The partner's mental model is: "Can this position return the fund if this company becomes huge?"

Walking through follow-on math

A seed lead invests $3M for 15% post-money. They reserve another $6M for Series A and B.

Never follow on, later rounds dilute to 6%:
  $1B exit × 6%  = $60M to the fund
  Strong, but not "$100M from one name."

Follow on and hold 12%:
  $1B exit × 12% = $120M to the fund

Reserves are how funds stay on the bus. A fund that owns 10% at exit needs a $1B+ exit to return a $100M fund from that one company alone (before preference stacks and further dilution). That sentence drives power-law behavior and valuation fights.

Under-reserving is a classic small-fund failure: too many first checks, no powder for winners, ownership crushed by the time outcomes mature.

Common mistakes

• Counting the entry percentage as the exit percentage. Later rounds dilute you unless you follow on.
• Writing 40 tiny checks from a $100M fund. Winners will not have reserves behind them.
• Ignoring fund size when you hear "we own 15%." 15% of a lifestyle outcome does not move a large fund.

Check yourself

A $100M fund owns 10% at exit. What exit size returns the whole fund from that one company (ignoring prefs)?

A $1B exit: $1B × 10% = $100M.

Why reserve $6M behind a $3M seed check?

To buy later rounds and hold ownership closer to the original 15% instead of being diluted to a slice that cannot return the fund.

Key takeaways

• Initial check plus reserves — not one-and-done — is how leads stay on winners.
• Entry ownership for leads is often 10–20%; exit ownership is what counts.
• Under-reserving is how small funds miss their own breakouts.

Further learning

The power law is the strategy this ownership math forces. Hub: how venture capital works.