First of all, I should say that 50% out of nothing is still nothing. You shouldn’t be afraid of giving equity, however, you should be smart about how much you give and to whom. If an investor asks for 50% of equity he is probably inexperienced. Why?
1. If he has the majority of equity, you are actually not the owner of “your” company, ergo it’s not your company. If he is asking for 50% he is probably an angel investor, which means you “lose” a lot and you haven’t even started. In fact, you just had your first exit, and you can go on vacation. This will most likely kill the entrepreneur inside you and if the dark days come (and trust me, they will) you are probably more likely to raise hands, say that it’s not your project anyway, and leave.
2. If you are willing to give away 50% of something that’s so valuable and spectacular, why are you doing it? If it’s not that spectacular, why would I want to do it in the first place?
3. If the investor is experienced, he is probably testing you, your negotiating skills and your perception on value of the idea. But in this case, he will probably start with a much lower take in equity depending on the region, industry, market size, etc.
How much of equity should you give away to an angel investor? It depends on many factors, sadly your location is the first one that will influence this decision. In Silicon Valley, angel investors get below 10%, but in other parts of the world equity goes as high as 30%. You should also take into account if it’s „smart money“ or just money, that you are getting.
If your angel has a big contact list, or Rolodex, as they like to call it, perhaps it’s worth a consideration. Sometimes 30% equity means the success of your startup, and 6% means failing. This is something you will have to decide on the spot, since these decisions are really unique, custom and differ from case to case.
Giving away equity also depends on the amount of money you are getting. Also, this sets the current value of your company. But, company valuation isn’t something you should be concerned at this stage. Now your top priority is to launch early, launch often or as some say “fail fast”. Or as Guy Kawasaki would put it: „Don’t worry, be crapy“. So let’s take the 50% equity as an example and see how it would play out.
Angel investor: Your project looks interesting, and I am interested in taking a shot. I can give you $50.000 for return of 50% in equity.
You: Thank you very much, I am glad you like what we are doing. But, I am willing to give 10% at most. I want to leave room for first team developers, and VC fond.
Angel investor: Ok, even 10% sounds good, but than I am willing to give only $10.000.
The question now is, what are you going to do with only $10.000? Is this investor worth the bother? Are you going to answer his phone calls on Sunday when the project starts to go south? Is this investor going to scare away other bigger investors that want to be alone before the VC fond comes? What if you took 30000 for 15%? How much money do you need in order to get the startup moving and making first sales? How much money/time do you need until first sale? How much money/time do you need until break even?
I know I put up a lot questions, and not so much answers. However, asking the right questions will move you in a direction you want to go.
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[EDIT 22nd, August, 2014] If you liked this blog post, perhaps you will like the ebook]