How much equity should you sell in the first round of funding? Well, that depends.
Some entrepreneurs have the money to launch their startups and build value while retaining all the equity. Obviously, this is ideal. Don’t give up equity unless you have to! But if you choose to pursue funding to launch your startup, get your expectations right on how much equity you will ultimately own.
A startup which requires outside funding to launch is considered very high risk.
To attract seed capital to build your product, you’ll likely need to trade up to 60% of the equity for the money. In addition, you will most probably need to build a founding team. Getting the right people on the bus makes the startup go but also costs you equity.
These two bites of the apple, seed investors and co-founders, will ultimately dilute you to 30% of the ownership.
Here is how it works:
- Initial investment at the formation of the company. Entrepreneur 40% – Investors 60%.
- Founding team set aside of 20%. Entrepreneur 32% – Investors 48%
- Option Pool for employees of 10%. Entrepreneur 28.8% – Investors 43.2%
These are common terms in deals where the investor funds the company until it becomes cash flow positive (CFP). Agree to a number for funding to get you there and then add a bit of a buffer. If the entrepreneur gets to CFP on less money than expected then there may be an incentive for the entrepreneur/founding team to gain additional equity from the investor pool.
Keep in mind, these equity estimates are based upon getting funding to launch and grow the company. You can retain more equity if you have the capacity or friends and family resources to fund the launch and grow your startup which is much more ideal. By providing the initial funding, you take some of the risk off the table.
Bottom line? Bootstrap if you can, because a significant chunk of equity will be exchanged for that initial round to build.
The good news? There are a lot of possible paths to success. You can do this.
This post was written by Charlie Paparelli. He founded and leads the Angel Lounge for angel investors and serves as a Mentor at Atlanta Tech Village. For more startup advice, subscribe to Charlie’s blog here.