Investments · Equity

How much equity should I give away?

Karan Rai Founder at Startup, E-commerce Entrepreneur ◆ Fashion & Beauty Writer ◆ Fashion Stylist

October 25th, 2015

An investor is willing to give me the startup capital I need, $40,000 to get my business off the ground.

My business is just an idea at this stage. 
 

The investor wants 60% equity in the company. I would retain 100% control of the company in terms of decision making and buying etc. They just want 60% of the profit share.

I have no startup capital right now.

What should I do?

Anonymous

October 25th, 2015

Hey Karan - Run away from this person. Quickly. At best, he/she doesn't know much or anything about investing, if that's the proposal.  If this kicks it off and you're successful, you'll raise a seed round that gives away another 20-30% of the company.  At that point, you've got all the risk of an early stage business but you're working for others who own almost all of the company, so the numbers simply don't work. How to fundraise outside of this person is an entirely different conversation, but I'd run from this person.  We dealt with someone like this in the early days of my first company, and it only got worse with time. It's tempting when you've got nothing yet, I know, but find another way. 

Joshua Langenthal co-founder at San Francisco Flamethrowers

October 25th, 2015

stop thinking about SELLING equity in your company as giving it away.

John Seiffer Business Advisor to growing companies

October 25th, 2015

Hard to believe that 40K would get an investable business off the ground. You could build a product for that and certainly launch a bootstrapped company. But to grow one to the point you'll get the investor a good return on their money, you'll need a lot more than 40K. If you give away 60% now what will you have to offer subsequent investors?

I have no idea what kind of business you're thinking of or what your experience is but I'd suggest you forget about "launching" and start talking to customer or prospective customers. Find out how valuable they feel like the problem you're planning to solve is worth. If yours is a B2B situation, you might even find customers who want your solution so badly they are willing to fund your development costs. It's a long shot but if you can't find people like that you may have a harder time launching the company than you think. 

Mark Kim

October 25th, 2015

I agree with what the good people on this thread are saying.  Not sure how much runway you get for $40k, and you are much better off bootstrapping and getting your business more developed if you don't want to give away a good chunk of your equity.

That potential investor is not the devil though.  If you have just an idea with nothing developed, you will give away a large part of equity.  If you don't want to lose your equity, develop the idea more.  Let me know how I can help.

Bill Warner Managing Partner of Paladin and Associates

October 26th, 2015

Stop what you are doing and get professional help. That is far too much. They are saying your business is worth about $27,000 now, adding their $40K giving them about 60%.

In addition, you should push all other alternatives before going with an equity deal at this stage. You are in loan territory from friends and family. 

You mentioned profit sharing. This is not a profit sharing deal. That would not be equity, and should be enough to pay them back with a healthy interest rate. 

You are quite confused. Run and get help.


Calvin Moore CEO and Founder of CEM Environmental

October 27th, 2015

Hi Karen. I run across this all of the time when I advise all different types of start-ups. The 1st thing that both you and your investor need to do is understand the difference between the terms "investment" and "business development". If you can do that, then this scenario might work for you:

1) For $60,000 you might want to structure a FIFO deal (First In, First Out). You will allow for an investment of 60K paying 10 to 15% interest. Based on your business plan, you should be able to predict when a note like this should be able to be paid off;

2) As collateral you will pledge 60% of your company;

3) Once the note is paid back, you will get back 55% of your company allowing the investor to keep 5% as good faith.

This is just one of a million different ways to creatively structure a deal whereas the investor gets what he/she wants, and you get what you want. The main thing is that you communicate with your investor...they might not want the 60% in perpetuity, but just as collateral as you grow the business. If this is the case, then structure the deal accordingly, if not, then you must re-think the structure of a deal that you can live with...and there are a million more different ways to do that. Hope this helps? Good Luck!

Tim Child CTO at EARN.org

October 27th, 2015

Question:  "How much equity should I give away?"
Answer: None, you don't give it away!  You are selling it!

If the price it right take the offer. I this case you need to  write a business
plan. Estimate how much $ you need and what the  $ return will be and shop it around  to see what others will offer.

Dean Kelly Founder, Investor, Advisor

October 25th, 2015

Without knowing anything at all about the specifics, I would suggest you find a new investor very very quickly, as you do not want to work with someone like that long term.

Bill Keating COO at Seebright

October 25th, 2015

Karan, 60% is way too much! 10 or 20% would be generous. We don't usually priced rounds this early for the obvious reasons. It is better to use a convertible note with a 20% discount to the next round or so. It will be easier to price the company at that time. Good luck! Bill (650) 722-3333

Shobhit Verma

October 26th, 2015

Take the money! 
You will both learn a lot from this experience!
I know you are a first time entrepreneur and I saw  some of your other questions on FD. I would like you to learn how to commit yourself to one idea and give it your 100% 
I would also like you to learn that chances of succeeding in your first startup is next to nothing. It is a game you play enough number of times and if you are lucky you build the right skillset, learn to identify risks earlier on and get in touch with the right people to eventually do something together that brings you overnight success (after years of hard work).
That will be a different idea and a different team with different investor. 
Take the money and learn how to execute an idea. Another way to think about  this situation is that this guy is generously funding your education!!!
It will be a good lesson for this investor as well. He will learn not to be greedy next time and learn to make his next investments wisely.