How much equity should you be prepared to offer to get your first investors? Is it worse to ask for too little or too much? Talk to a financial expert to find out Let's look at.
As an entrepreneur, your business can become very personal.
Turning a fiery idea into something full-fledged can take you on a roller coaster of emotions that only those who have experienced it can truly understand.
It's no surprise, then, that the impact of this journey can make it increasingly difficult to relinquish control.
However, as difficult as it may be, you need to be prepared to take advantage of your investments at the right time.
Even if it means offering large amounts of equity to investors to jumpstart themselves.
Find the magic number
Every business is different, so whether you're considering angel investing, private equity, or another type of finance entirely, there's no set up for entrepreneurs to decide how much equity they need to offer. There are no standards.
However, there are many words of wisdom to embrace and pitfalls to avoid as your business takes its first big steps.
Many advisors claim that the general guidelines for those just starting out are: 10-20% of capital.
If your business grows over time, giving up any more too soon may prove risky. It may face multiple funding rounds in the future, which could further dilute its share.
Therefore, if you “follow the money” and donate a significant portion right away, you may end up with much less in the future than you originally expected.
How about going further down? Why not instead opt for a series of small raises? That's certainly an option, but it comes with the potential risk that you might not be able to secure the amount you think you need upfront, and you don't want to reverse the situation. , it's also worth asking how involved an investor with very little stock is likely to be.
keep perspective
From angel investing to venture capital, asking too little is almost always worse than asking too much, suggests BVCA Executive Director Tim Hames.
“For example, asking for 5% isn't enough money to support you, and it's not enough money for investors, because you're spending time introducing you to people you don't know. Because it's not enough of a commitment for them to decide that they should. Please use their experience etc. to help you.”
There are implications for long-term relationships here as well. Hames advises: “Even if you ramp up, you can always scale back, because if you go back and ask for more, you’re going to annoy people and make it look like you don’t know what you’re doing.”
And investors won't be afraid to downsize you.
But ultimately, it's important to first assess your business as accurately as possible and demonstrate your commitment.
It is a good reflection of you and your business, giving investors a transparent view of your business, the funding you need and why you need it.
From there, investors may consider scaling back or investing more, depending on your business and how they view it.
know what you want
Still, what you can ask and expect may be due to factors beyond your direct control.
Experience and track record, whether you already have it or not, play an important role in determining how much control investors feel they need. That means investors may want more equity to cover their backs.
You may also be operating in a fast-growing sector or have seen your business making waves. This means it can legitimately consider holding more capital than other companies of similar size.
At the end of the day, it's important to understand your business and how it will grow before identifying where the value lies.
This is appealing to investors who want to know you've done your due diligence, but also know what you need to do moving forward and then, and in what amount. It also helps in converting. You are willing to part.
This is generally a good option if the investor believes that committing their money, expertise, and influence will help the business grow by a greater percentage than the percentage of equity they are seeking to acquire. can be considered as.
Think about where you are going and what it will take to get there.
That way, you can find a partner who is right for you and not just a person.
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