After A Hot Start, Justin.tv Spins Off Socialcam, Its ‘Instagram for Video’

I've been on the founder side (trying to convince investors to spin off a new company) and the pitch goes like this: Before, you had an ownership stake in 1 company with two products. After, you have an ownership stake in 2 companies. Both of these companies are out to grow, raise money and exit in their own right, and have teams solely devoted to hitting a home run. From that perspective, you could argue that you now own more than you did before, essentially by growing the pie.

An example might clarify it. Let's say Justin.tv thinks SocialCam is worth $1 million. So, those 100 shares are worth $10,000 each. In the scenario above, SocialCam might:

- Sell 50 shares to an outside investor, for $500K. (So there are now 150 shares. But the company is worth $500K more, or $1.5 million. $1.5 million / 150 shares = $10K per share, the original price).

- Grant options with a $10K strike price. This would dilute existing investors, and thus slightly reduce the value of their stake. But a) this is standard for many companies--they issue shares to managers, and figure that the equity incentive pays for itself through higher performance (see http://paulgraham.com/equity.html ), or b) SocialCam's founding team might exchange their Justin.tv shares/options for SocialCam shares/options. As long as investors agree on the value for both companies, that's a fair deal.

I hope that explains it. This kind of thing is usually done with board approval, after discussion with the board, so it's unlikely that anyone did anything underhanded.