How much equity should you be prepared to offer to get that first investor? Is it worse to ask for too little or too much? We chat to financial experts to find out.
As an entrepreneur, your business can be an intensely personal thing.
Turning a burning idea into a fully-fledged entity takes you on a rollercoaster of emotions that only those who experience it can truly understand.
Little surprise then, that the impact this journey has can make it all the more difficult for you to give up control.
But as hard as it may be, you have to be prepared to take advantage of investment when the time is right.
Even if that means offering an investor a large chunk of equity to catapult yourself forward.
Searching for the magic number
Every business is different, so whether you’re considering Angel Investment, Private Equity or another type of finance entirely, there’s no set standard to determine how much equity an entrepreneur should be looking to offer.
There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step.
A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
Giving up any more right off the bat could prove risky if your business grows as time goes on, as it’s possible you may face multiple funding rounds further down the line, which will dilute your share further and further.
So, if you’ve ‘chased the money’ and immediately given away a significant chunk, you could end up with far less than you’d initially hoped further down the line.
What about going lower still? Why not opt for a series of smaller raises instead? It’s certainly an option, but along with the potential risk that you may not secure the amount you feel you may require up front, it’s also worth reversing the situation and asking how involved an investor with so little equity may be.
Keeping Perspective
In most cases – from Angel Investment to Venture Capital – asking for too little is worse than asking for too much, suggests Tim Hames, Director General of the BVCA.
“Asking for 5%, for example, is not enough money to assist you, and it’s not enough money for the investor either because it’s not enough of a commitment for them to decide they should spend their time introducing you to people you don’t know, giving you the benefit of their experience etc.”
There are longer term relationship implications here too. Hames advises to: “Pitch high and you can always be scaled back – because if you end up going back and asking for more it annoys people and looks like you don’t know what you’re doing.”
And investors won’t be afraid to scale you back.
However, ultimately, valuing your business as accurately as possible – and showing your working – in the first instance is important.
It reflects well on you and your business, and provides investors with a transparent view of your business, the finance you need and why you need it.
From there, an investor may look to scale you back or look to invest more, depending on your business and their view of it.
Know what you want
Still, what you can ask for and expect may come down to factors beyond your immediate control.
The experience or proven record you may or may not already have, will play a key role in investors determining how much control they feel they need, meaning they may look for more equity to cover their backs.
You may also be operating in a fast-growing sector or have seen your business generate a buzz that means you can justifiably look to retain more equity than other companies of a similar size.
Ultimately, it comes down to understanding your business and being on top of how you think your business might grow, before identifying where the value lies.
That won’t just be appealing to investors who are keen to see that you’ve done your due diligence, but it will also help you work out what you need right now to move forward and later, help you translate that in to how much you’re willing to part with.
If you believe an investor’s injection of finance, expertise and influence will collectively help your business grow by a larger percentage than the percentage of equity they are looking to take, then in general this could be seen as a good option.
Have an idea of where you might be heading and what you’ll need to get you there.
Then you can find the partner – not just the figure – that works for you.
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FAQs
A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
How much equity should I give to an investor? ›
You shouldn't give up more than 10-15% for your first $100,000 and from that point forward, you should budget between 10-20% dilution per each round of subsequent dilution.
Is 1% equity in a startup good? ›
Up to this point, generally speaking, with teams of less than 12 people, the average granted equity for startup employees is 1%. This number can be as high as 2% for the first hires, and in some circumstances, the first hire(s) can be considered founders and their equity share could be even greater.
What is a good equity offer? ›
On average, startups are reserving a 13% to 20% equity pool for employees. This is important for startups to consider before they pursue series funding or other investments, in which they may be offering percentages of equity to investors.
Is 5% equity a lot? ›
As a rule of thumb, a non-founder CEO joining an early-stage startup (that has been running less than a year) would receive 7-10% equity. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years).
What is the 2 20 rule equity? ›
This is also known as the “2 and 20” fee structure and it's a common fee arrangement in private equity funds. It means that the GP's management fee is 2% of the investment and the incentive fee is 20% of the profits. Both components of the GPs fees are clearly detailed in the partnership's investment agreement.
What is the 1% rule for investors? ›
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
How much equity should a VP get? ›
For early-stage startups, equity tends to be higher, around 1.5% to 3%, to compensate for higher risk. On the other hand, for more established companies, the range is usually 0.5% to 1.5%. This allocation ensures the VP of Sales is motivated and aligned with the company's long-term goals.
How much equity should I give my startup advisor? ›
Typically, individual advisors can expect to receive anywhere between 0.25% to 5% - but the exact percentage ultimately depends on how much the advisor contributes to the company's growth, the advisor's expertise, and how much you're willing to give away!
How much equity should a startup give away? ›
Founders typically give up 20-40% of their company's equity in a seed or series A financing. But this number could be much higher (or lower) depending on a number of factors that we will discuss shortly. “How much equity should we sell to investors for our seed or series A round?”
Equity offer calculation. Equity value is the value that can be attributed to a company's shareholders because they provided the stock. The current share price is multiplied by the total number of shares outstanding to arrive at the equity value.
How much does a startup VP make? ›
As of Aug 12, 2024, the average annual pay for a Startup Vp in the United States is $157,532 a year.
What is considered a good equity? ›
Equity ratios that are . 50 or below are considered leveraged companies; those with ratios of . 50 and above are considered conservative, as they own more funding from equity than debt.
How much equity should you leave for investors? ›
The origins are a bit fuzzy, but it's believed that the 20% rule became popular because it strikes a balance—it's enough to entice investors with a significant stake, yet it allows founders to retain control and still have enough equity for future funding rounds.
How much equity is considered rich? ›
But younger generations also had lower thresholds for what it takes to be rich, with Gen X pegging it at $1.2 million and millennials saying it requires $2.2 million. Boomers, meanwhile, had the highest yardstick for being considered wealthy, at $2.8 million.
How much equity to give to a founding engineer? ›
That's a basic way to look at things, but just remember, be fair and use those general rules up to about three quarters of a percent for senior engineers up to maybe from a quarter of a percent to half a percent for your junior engineers, for early stage companies, and you'll be just fine.
What is a good percentage to offer an investor? ›
How Much Share to Give an Investor? An investor will generally require stock in your firm to stay with you until you sell it. However, you may not want to give up a portion of your business. Many advisors suggest that those just starting out should consider giving somewhere between 10 and 20% of ownership.
What is the 20 investor rule? ›
Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How much equity to give angel investors? ›
Angel investors typically aim for a stake, ranging from 15% to 20% of the company. Sometimes the percentage can even go as high as 25%, however, it is important to understand that a higher stake doesn't necessarily equate to a higher chance of big returns.
How much equity should I give my advisors? ›
Typically, individual advisors can expect to receive anywhere between 0.25% to 5% - but the exact percentage ultimately depends on how much the advisor contributes to the company's growth, the advisor's expertise, and how much you're willing to give away!
