How much equity should an entrepreneur give up to investors? This is a question we get a lot and while there is no single answer, there are a number of ways to think about it:
- Try to imagine all the fundraising events your business is likely to go through until it exits. If you give up more than 50% of your equity in the first round, you're not likely to end up with much following three further rounds of financing. If you think your business will need several capital injections, try to space them such that you raise only 18-24 months' worth of capital each time. This will give you an opportunity to use business progress to increase your valuation between fundraisings.
- Factor in the equity you will need to set aside for an employee option pool (say 15-20%) and for future senior executive hires (you'll definitely need some!), perhaps another 10-12%. This may seem like a lot when you're just a few founders owning and running the whole show, but if well managed those equity grants will create a lot more value than they cost you in dilution.
- Bear in mind that "control" of your business is not only determined by your level of share ownership. Dropping below 50% is not the end of the world. In fact, few venture-backed businesses reach a successful exit with more than 1/2 the equity still in the hands of their founders. Your control of the business depends as much on your equity stake, as it does on the terms of your shareholders agreement, your employment agreement, and -- perhaps most important -- your day-to-day operational influence on the business. If you're critical to the operations, then you have significant influence vis-a-vis the investors, whatever the equity split.
The typical Silicon Valley venture model (seed round followed by A, B, C rounds) might look like this:
- Seed: raise $200k from friends & family at a pre-money of $1m. Founder stake is now 83%.
- A round: raise $1m from early-stage VC at pre-money of $3m, and create 20% option pool. Founder stake is now 50%.
- B round: raise $5m at pre-money of $10m, and set aside 10% equity for senior hires (VP Sales, CFO, Head of Asia, etc). Founder stake is now 36%.
- C round: raise $10m expansion capital at pre-money of $25m. Founder stake is now 23%.
That brings total investment to $16.3m, with the last round investors in at $35m post-money. That's a reasonable amount of capital and a reasonable distribution of equity: at a $100m exit the last investor triples his money, the founders split around $23m, and the earlier investors get as much as 10x their invested capital. Champagne all round.
In Europe there are fewer "typical" fundraising sequences, also because more companies are bootstrapped for longer before they raise capital. But the rules of thumb still apply: be prepared to give up 1/4 or 1/3 of equity just for options, executives, board directors and other key people. And raise capital judiciously over time, matching each stage of your company's development with the right type of investor and the appropriate valuation. Avoid huge swings in valuation as these can put a serious strain on relations with and among your investors, and may end up preventing you from raising capital if things don't quite go according to plan.