At some point most startups will be in need of financing. Whether you need additional employees or new technology – it all takes money. So, determining exactly how much equity to give to investors it vital. You do not want to give away more than necessary while still attracting your perfect investors. Here are some things to consider:
Maintenance of Control:
Most likely you are hoping to maintain as much control as possible in your company. However, your investors are going to require a certain percentage to make their investment worthwhile. Depending on the structure and financial needs of your business, it’s easy for owners to quickly become merely minority shareholders. This is not always a terrible thing. So, it is important to consider how much control you want and to discuss this with a startup lawyer – this will ensure you’re not giving too much away.
The ownership percentage for the business is generally calculated by determining the amount of investment divided by the value of the company. For this reason, the company valuation is subject to considerable negotiation. Once the company valuation is established, the company and the investor will negotiate the benefits associated with the equity interest. Do not offer anything to an investor until you know the exact valuation you are going to use.
If you’d like a more in-depth look at this topic, please take a look at a blog post on my company’s website with additional information. You can find it here.