Bottom line: If you are taking outside money and if this is the first chunk of money being invested into your business, you should not be giving up more than 20% of your business for this investment. Here are a few reasons why:
- You might want to raise another round of funding down the line. Giving up too much too early does not leave you with enough ownership or leverage in future deals.
- You’ll need the equity to attract top talent – anyone who knows their worth will look for a decent equity percentage in their job offer.
- When you’re starting out equity is one of the most important assets you have in your business, so guard it ruthlessly.
- Co-founder investments work differently. If you and your co-founder(s) are jointly funding the idea, then the business ownership is typically split up based on the amount of money being invested – simply take the percentage of who put in how much and that’s each of your ownership. Note to keep this if you try to put a dollar value on ‘whose idea it was’, that might not be ideal since that’s not a quantifiable amount.
Oh and stay away from that rich friend who is totally sold on the idea and wants to invest, especially if they aren’t experienced venture or angel investor. You’ll end up wasting a lot of time on ‘investor relations’ with them and they may not bring a lot to the table other than their checkbook. Look for the ‘smart money’ investors instead, folks who can also help nurture and grow the business.