Question: How much equity should I give away to an investor?
Answer:Giving away equity means allocating shares and therefore, a certain percentage of ownership of your company to a third party investor. You may issue shares to third parties at various points in the life of your business. The amount of equity you choose to issue will depend on the particular raise and how urgently you require their investment. The bargaining power of the investor and company, influences the amount of equity given, class of shares and any associated rights.
Sophisticated investors may request a particular class of shares and/or specific rights to protect their interests. These rights could include:
- voting rights,
- the right to appoint a director,
- anti-dilution rights, and
- liquidation preferences.
The rights that you give one shareholder can impact all shareholders and your business prospects. Therefore, it is important to consider the implications carefully, especially because a relationship with an investor can be long-term.
Investors can make a valuable contribution beyond their funding. You may benefit from your investor’s industry or product/service-specific know-how and introductions to contacts. Your investor may also commit to working in your business and contributing to its success on a daily basis.
As a founder, you should also consider how the investment will impact your shareholding and the dilution of the percentage of your ownership. It is vital to consider what you will be content with before giving away equity. If you are planning to raise future rounds of capital, and you hold ordinary shares, your shareholding will likely dilute. You need to ensure that you have planned for the impact of dilution. Further, you should maintain a level of ownership that will keep you motivated.
In summary, the right percentage and type of equity to allocate an investor will depend on your business’ situation and on your goals.
