How Much Equity Should You Give Away To Investors?
Ideally you and your founding team should fund the company as far as possible until you can reach a high enough valuation to raise a good amount of capital, while aiming to give away 25% or less of the company in the first round.
Here are 2 main factors that should affect your decision as to how much you choose to give away:
1. How Much You are Asking For and Why
Typically companies will raise enough funding at each round to sustain a 9–12 month runway and present a definitive plan for how this money will be spent and fuel further growth. Before you talk to investors you should have a very clear idea of how much you’re asking for. Some investors like being given a choice. Others would prefer just a single figure.
A sensible way to present an investment range to investors could sound like this:
“We prepared Conservative and High Growth business plans, one needs £500K investment, the other we’re looking for £1M to scale fast”
However, giving too broad a range without explanation could give far less of a good impression. For example:“Somewhere between £500K and £1M would make us happy”
2. Your Plans for Future Funding Rounds
You should assume you will raise 3 or more funding rounds before you’ll have a self-sustaining business (or be acquired!). However, each time you give away equity in your company, your shares are diluted meaning that you own a lower percentage of your company. If you give too much equity away early on, you may not have very much equity left for future rounds.
Consider the scenario that you and your cofounder start with 40% of the equity each (leaving 20% for stock options, other team members, etc.) You then give away 30% (i.e. dilute your holding) of the company at each round.
At the end of the 2nd round you’ll have just under 20% equity. And after the 3rd funding round just under 14%.
Founders can easily find themselves reduced to minority shareholders, which probably isn’t your plan.