When starting a business, one of the most important decisions you will make is how much equity to give up upfront. Too little, and you may not have the resources you need to get your business off the ground. Too much, and you may be sacrificing potential profits down the road.
When determining how much equity to give up, there are a few things to keep in mind. First, think about how much money you will need to get your business up and running. You'll also want to consider how much money you can afford to lose if your business fails. Finally, you'll need to decide what percentage of the company you're willing to give up.
There is no right or wrong answer when it comes to equity—it depends on your specific situation and goals. However, if you're looking for some practical, ballpark guidance, here are a few benchmarks to help you get started:
10 to 20 percent of your equity in the company is a fairly common amount to give up during the initial stages of fundraising. This amount ensures that you'll have the capital you need to begin, but also that you'll still own the vast majority of your startup. With this amount, however, you'll still have to scrimp in order to make sure that you don't take more money than you need.
So, make sure you explore all possible options when it comes to locations for your business, including a home office. Also, try to find alternative forms of compensation besides a base salary for any staff that you may need, even if it means a slight further dilution of your equity.
Sometimes, you have no choice but to give up 30 percent of your equity or more. Perhaps, your pre-money valuation isn't that high, or the business that you want to start requires a massive infusion of capital just to get things started.
While surrendering this much value isn't inherently bad, you will be much more at the mercy of your shareholders when it comes to how you run your business. The thing to remember is that this is your enterprise, and you want to do everything you can to retain as much control and rights to the profits as possible.
Startup Equity Software and Apps
The good news is that when you're deciding how to dilute equity in order to raise capital, there is startup equity software that helps you make fundraising calculations. You can easily adjust the pre and post-fundraising valuations and see how different equity dilutions to both stockholders and potential investors might affect your personal bottom line.