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 investors. 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.