What amount of equity do we have to give up for raising money for a startup?
March 23, 2009 by Debt Equity Financing
Filed under More Equity Answers
Can you answer sp786’s question about Equity?:
We’re a startup with a really good concept/idea that can sell and we are various offers, we are entertaining various offers, some asking for large chunks of equity but guaranteed immediate moderate amounts of cash, the others are willing to give larger for smaller stake sold but take longer? What is the optimal amount to give up for the capital you need?
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We’re a startup with a really good concept/idea that can sell and we are various offers, we are entertaining various offers, some asking for large chunks of equity but guaranteed immediate moderate amounts of cash, the others are willing to give larger for smaller stake sold but take longer? What is the optimal amount to give up for the capital you need?
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There’s no set answer because it depends highly on your personal situation.
If you’re in a business that’s not capital intensive (e.g. software), then you can probably keep most of it and leverage that into letting the VC just take a small portion so you get a little working capital.
If you’re in a business that needs lots of capital to function (e.g. manufacturing businesses), then you’ll need to give up a lot more equity to fund your operations.
They’re greedy, though. 60% is not abnormal. Figure out how much cash you need for a while. It’s really bad to run out of cash, obviously, so leave some room for error, but there’s no point in giving up more equity than you need to. Remember that there will likely be multiple rounds, and I don’t know which round you’re at.
Get comparable companies that have successfully raised money and compute the amount of equity they gave up during the fund-raising. Use that as a benchmark for your own deal.
My own benchmark here is that the earlier you are in the development stage, the more equity you should give to investors, because they are taking more risk. If your product is more or less operational and ready for sale, you should give much less.
there are ways to come up with money without risking your home. Dont use the equity in your home, its too risky, and not worth it. Find a silent partner, a rich guy who you can get interested in your idea, but who doesnt have time, or care to do anything about it, and will invest in YOU, thats the key you need to not only sell your idea, but sell yourself. There are numerous others ways of using other peoples money (OPM) to finance a business, if it is a good idea. I know it hurts to hear (cause the banks have united with capital america into making average americans think that putting up your home is the best, smartest, and easiest way to go),but dont risk your home equity, the only think it is is easy. Research the internet, find what are called Angel Investors (google it - I mean Yahoo it
you can find another way. Good luck. If worst comes to worse, save up what money you can to do it. A good option is to find another partner with money, everyone in a partnership needs to bring something to the table, many are willing to bring money to the table but not much else, thats where you come in. You but in the sweat equity into it, the leg work, day to day ops, etc. You can make it happen. Put an add in the paper looking for investers, do whatever, but seriously, i know it seems like the best option right now cause its quick and easy (thats how the banks want it), dont risk losing the equity in your home, your home itself, or financial ruin. Sorry, probably not what you wnated to hear, but many many people use OPM to do this, just wanted to let you now there are other options out there.
VC’s will typical ask for at least 50-80% of a company. They are trying to gain as much control as they can.
If you’re sole goal is to preserve ownership %, then the best route is to try and raise cash via friends and family at first.
Once that is exhausted try for angel capital but really limit the amount of money to what you absolutely need to purchase.
After both of those have been exhausted approach the VC’s for more significant investments, but hopefully you’ll be farther along in the product development and the risk is lower to the VC because you have more tangible product, and therefore you have more leverage than you would have sans product.
There is no formula that can be applied here, it’s really more about managing risk and having leverage when negotiating. Not to mention the strength of the idea and the timing and motivation for VC’s to adopt the risk. If this is a hot idea in and up and coming area and you have a solid team behind you then it’s easy, but if you’re entering a market that is already well defined and is not attractive to the VC then it’s harder.