How Much of My Company Do I Offer Investors

Investors have the power to say "no" to a deal. Consider the needs of the investor, which prioritize getting cash out in a reasonable time over having a share in a healthy company. Here are some general thoughts to keep in mind:

– It is generally not advisable to secure funding from naive individuals, such as friends and family, who may offer small investments for ownership. These deals are often unfavorable for both parties, with low or no return for the investors and interference from unsophisticated investors in the company’s growth prospects.

– Starting a company with naive investors should be carefully considered. See my previous post on the importance of finding knowledgeable investors.

– Outside investment is suitable for startups with scalable, defensible, and high-profile business models, led by experienced management teams. To attract professional investors, a credible exit strategy within three to five years should be in place. If these criteria are not desirable, revise your business plan to require less investment.

– Investors typically seek sufficient control to ensure that you don’t decide against selling the company. While not every investor will demand over 50% ownership, they will want to see that, collectively, outside investors hold the majority. Their profit comes from the sale of the company, not from your success.

– Be cautious about offering equity to individuals you don’t want permanently involved in your business. Giving away small percentages to professional advisors or relatives can create complications down the line. These shares may be needed for future employees if your company grows, or those individuals may become persistent in seeking financial support when it is not feasible.

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– Keep in mind the relationship between equity and valuation. By managing the valuation of your company, the amount of money investors provide in exchange for ownership can be determined. For example, if you offer 10% equity for $250,000, you are valuing your company at $2.5 million. Can you justify this valuation to investors? Will they agree?

Remember, these are general guidelines and there are exceptions. It is crucial to carefully evaluate each investment opportunity based on its unique circumstances.

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