Fundraising · Equity

How much equity to give away in seed funding with pre-money $1.5m for $200k?

Mike S Director at Vector Analytics

August 7th, 2015

Have tested idea. Need $200k to launch and survive for initial long sales cycle. Pre-money evaluation is $1.2m. Seed investor interested to fund $200k asking for 14% equity. Am I giving too much equity right now?

Robert Clegg

August 7th, 2015

Don't quibble on a percent or two. Seriously? You would lose the deal, ruffle the feathers on a few theoretical thousand dollars on your fictitious projections?

And make sure you give him incentives to participate in the next round. 

I tell ya, if you had already given me your valuation and now want to change what you said, ...

Don't be greedy and stupid. You've got a long long way to go.

Benjamin Olding Co-founder, Board Member at Jana

August 8th, 2015

Maybe this is a pet peeve of mine, but I really hate the phrase "give away" in the context of equity.  It's like nails on chalkboard, at least for me.

You are selling equity, not donating it!  What price should you charge?  Whatever the market will bear!

If you can't elicit an equivalent second offer (i.e. another investor seeking similar terms who brings similar expertise to your business), then you should either accept it or - if this is your first priced round - delay pricing by trying to negotiate for a note, as Steve suggests.

If you can get a second offer, don't auction the shares back & forth, but pick an aggressive number you see in the market for your stage and ask either if they'll agree to it in order to close.  If neither bites, listen to both and pick a slightly lower number that you think won't upset them until one says yes.

Either way, valuation is the least of your problems right now.  Here's what you should be worried about:

1) Is this enough cash to get you to safely a next significant milestone?  It's probably a much better idea to try to raise more money than $200k when selling 15% of your company than to sell, say 10% for $200k instead of 15% for $200k.  At your stage, if you don't like your valuation, deal with it by asking for more cash, not by trying to sell less for the same amount.

2) Liquidation preferences.

3) Anti-dilution clauses.

4) How do other investors view you after you close this deal (more likely to invest next time, less likely, or indifferent)?

5) Any accumulated interest rate hidden in those terms somewhere?

Your valuation is not your valuation...  It's your valuation under a very specific set of circumstances.  Think about all possibilities before you sweat what happens in the best case.

Also, the terms of your first priced round set precedent for later rounds - valuation does not.  So the terms of this document will keep coming back to haunt you no matter what.  The valuation only impacts you if you're wildly successful.  Focus on the terms or delay these decisions by using a note.

Alex Eckelberry CEO at Meros.io

August 7th, 2015

Equity is all over the place. It's whatever you can negotiate. 

I prefer to have angels convert to an A, perhaps with a 15%-20% discount. 

But you get what you negotiate in this case. 

John Deal CEO at IX Power

August 7th, 2015

Uh, ur new investor would own 200 out of 1.4 or 14.2%. Simple math. Sent from one of my iGrizz devices.

John Seiffer Business Advisor to growing companies

August 7th, 2015

Typically one negotiates about the pre-money valuation (this makes it easier to compare each round with successive ones). Frankly as an investor I think 1.4M is high for just a tested idea. If you have someone who thinks it's fair - go for it. 

Mike S Director at Vector Analytics

August 7th, 2015

John, perhaps I should give more context. I am in analytics space where typically the companies are evaluated at 1m +. I have committed sales worth $40k. 


Steven Rahseparian Founder & Chief Executive Officer at Secured Universe

August 7th, 2015

If you can hold off a bit more, I would recommend getting additional commitments/letters of intent. This can increase your valuation and prove your business model. So now you are not just an idea.

Also, anything less than $1M, I would just go convertible note. It's faster, cheaper, less complex, etc.

As it stands, every startup is usually valued between $1 - 8M by valley standards and where you fall in the range depends greatly on how far along you are.

The more you can build your sales pipeline / pre-sales, the more traction you can prove and the more value you are building BEFORE you take money.

Hold out if you can and build more value, or alternatively, negotiate with the investor to give you the funds in small tranches as you need it, each tranch being priced base on your progress.

So instead of changing your valuation, take less, give less equity right now, build more value, negotiate next round.  You save face, gain credibility for being savvy and investor will most likely like this approach too as it presents less risk.

Good luck!

Luis MD CEO at EDENIS

August 7th, 2015

Mike: 

I think you're going to have a hard time defending your valuation based on revenues at this stage. 'Angel' is a broad term encompassing investors that invest at the concept stage and others that invest when a company is at the cusp of 'booming'. If you're talking to Angels that understand your space, then product quality, company infrastructure, and market value would probably be weighed more heavily when negotiating pre-money valuation.

If you're just raising for capital to complete your next milestone and not considering whether the investor can bring relevant networks/expertise to the table, then 14% may be too much. If you can find an additional investor to jump in at the same valuation with expertise and resources to push your company through the next inflection point and/or raise, then giving away as much as 25% would be reasonable.

This all relates to your short-term needs and long-term goals. In my opinion, you should raise capital to complete a milestone that equates to a certain increase in value, or to secure runway to build on your team and key metrics, whichever will position you for a stronger A series or exit. 

In summary, the conversation changes based on what type of investor you're negotiating with and what value they can add beyond capital. The fact that you're a high-risks start-up that can 'bust' at any moment is a discussion that investors will likely lead, but don't let it overshadow this moment of complete autonomy that you have to select who your company is going to 'marry'. 

William Kerig Founder and CEO at RallyMe Inc.

August 7th, 2015

Take the money, take the money, take the money. Everything else is make-believe at this point. At your stage everything is very tippy. If you have someone who believes in you and your product, take the check and get going!

Steve Owens

August 7th, 2015

Avoid the whole valuation negotiation with a convertible note that converts to a discount to the Series A. Most startup lawyers are very familiar with this technique.  If you want some referrals to good startup attorneys, then just shot me an email