How Much Shares Should You Give To Investors In Your Company?
It takes a lot to grow a successful business since many pieces of the right elements like specific skills, experience, and funding are required to not just take it off the ground, but to ensure it grows into something of value.
While a business may be started with a few partners and little to no money, key investments are required at certain stages to ensure the organisation can experience faster growth and take on certain target markets that were previously perceived to be inaccessible.
But getting investment is hard! Extremely hard!! And when some entrepreneurs eventually secure the interest of investors in their business, they are faced with a critical question many have problems figuring out:
“How much shares should I give to investors in my company?”
Their responses to this question could either help them secure the investment or lose it all the same. Nevertheless, giving the right answer to this question with respect to a wide range of factors to consider is key to determining the right amount of equity you should give up in your business.
Before you determine how much shares in your company you should give to investors, first consider these 2 key factors:
1). How Experienced Is The Investor:
It is always best to only bring on investors that are well experienced in the industry your business operates in. The reason is their wealth of experience will not just help you avoid so many pitfalls, but would also ensure your business grows right and quickly. The knowledge these type of investors bring onboard could go on to be more valuable than the money they put into your business.
2). What’s The Person’s Personality Type:
When I refer to personality type here, I’m not talking about individual temperaments with respect to the Myers Briggs test, but rather, to how they relate to everyone around them.
When you bring on an investor, they’d permanently be with you for the long-term, and so, you have to ensure it’s someone you’re compatible with.
Are they annoying? Do they respect people’s opinions? Do they have a reputation for causing mayhem in past businesses they invested in? What else do you know about them?
The personality of the investor is more important than the amount of money they put into your business because a negative influence could someday even get you fired from your own company.
So How Much Shares Should You Then Give To Investors In Your Company?
Before you determine how much equity you part with in your company, the first thing is to know you must always have the controlling stake in the organisation. The moment you lose that, you’ve lost your business. This means that no matter the amount, experience, connections, and value the investor brings to the company, you must always control more than 50% of the entire organisation.
The next thing is to determine what your company is worth. If a person is investing $100,000 for 10% of the company, then it implies you’re valuing your organisation at $1,000,000. If the investor is investing $1,000,000 for 20%, then it means you’re valuing your organisation at $5,000,000.
Taking on investment early on is usually perceived as a win by millions of people, but in reality, it gives you a smaller negotiating power because your business hasn’t had the chance to prove itself. When you do this, you tend to lose a large part of your company, and if possible, could lose anywhere from 25% to 50%.
But there are instances where the prospects the business holds far out-weighs the early nature of the investment, and as a result, you may secure an investment worth millions of dollars while you only get to part with equity within the range of 5% to 20%.
In this scenario, you have to show and prove that the profit potential the business holds is oddly abnormal and can only be assessed within a certain region, time, or skill which you have access to. If you instead want to convince an investor that the profit potential your business holds is high, when all you have to convince them with is something that has never been tried in the market before, then you’re only going to waste your time.
So the ideal equity you should give up in your business is dependent on how much you think your business is worth. If you believe your company is worth $10,000,000, can justifiably prove it, and can reasonably show the prospective profit/revenue growth and future value of the business after receiving the investment, then offering 10% to 20% for a $1,000,000 to $2,000,000 investment is what you should do. But if you cannot prove any of these but instead intend to use hope and pray marketing to convince investors to make an unreasonable investment in your business, then you’re wasting everyone’s time.
To Sum It Up
Raising money to grow a business is hard. Finding the right business to invest your money into is also hard. But when you understand how valuations and fundraising work, you can better position your business in a ready-state for when prospective investors come along.
Remember, “when preparation meets opportunity, success happens.”
What are your thoughts on how much shares you should give to investors? Let me know by leaving a comment below.