I’m making my way through That Will Never Work, a biography about Netflix’s origin. I finally got to the part I’ve been curious about. Marc Randolph is the author and was the first CEO and cofounder of Netflix, along with Reed Hastings. I’ve always considered Reed the founding CEO, and this book is helping me understand why.

A little bit of background first. When they started the company in 1997, Marc and Reed each received 50% ownership. They valued the company—an idea and two guys—at $3 million (pre-money). They issued 6 million shares, with each share valued at $0.50. Here’s how the ownership looked at this point:

• Reed: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake
• Marc: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake

To capitalize the company, they raised $2 million from investors. The company was worth $3 million (pre-money) and raised $2 million from investors, so its post-money valuation was $5 million (pre-money plus cash raised). For their $2 million, investors were buying 40% of the company. Here’s the math:

• $3 million pre-money valuation + $2 million raised from investors = $5 million post-money valuation
• $2 million raised from investors / $5 million post-money valuation = 40% ownership

Six million founder shares already existed. To give investors 40% ownership, the company issued 4 million investor shares, increasing the total to 10 million: 6 million founder shares split between Reed and Marc and 4 million investor shares.

Marc had a young family and was working full-time in the business, while Reed was part-time and had ample liquidity from selling another company. Reed believed in the idea and invested $1.9 million of the money they needed, and angel investors contributed the other $100k. Marc didn’t invest any capital. Here’s how the 4 million shares issued to investors were split between Reed and the angel investors:

• Reed: 3.8m shares ($1.9m / $2m = 95%) * 4m investor shares
• Angels: 0.2m shares ($0.1m / $2m = 5%) * 4m investor shares

This is where the ownership between the two founders changed drastically. Reed was a cofounder and investor, while Marc was just a cofounder. Here’s how their ownership changed after this fundraise was completed:

• Reed: 68% = 6.8m total shares (3.8m investor shares + 3m founder shares) / 10m total shares
• Marc: 30% = 3m founder shares / 10m total shares
• Angels: 2% = 0.2m investors shares / 10m total shares

Even though they were cofounders and Marc was CEO, Reed had a majority 68% ownership position in the company and was also the Chairman of the Board. Marc was CEO but had only a 30% ownership.

In the next post, I’ll detail how the ownership and other dynamics led to changes in leadership titles.