How Much Equity Should You Give Away To Investors?
Ideally you and your founding team should fund the company as far as possible until you can reach a high enough valuation to raise a good amount of capital, while aiming to give away 25% or less of the company in the first round.
Here are 2 main factors that should affect your decision as to how much you choose to give away:
1. How Much You are Asking For and Why
Typically companies will raise enough funding at each round to sustain a 9-12 month runway and present a definitive plan for how this money will be spent and fuel further growth. Before you talk to investors you should have a very clear idea of how much you’re asking for. Some investors like being given a choice. Others would prefer just a single figure.
A sensible way to present an investment range to investors could sound like this:
“We prepared Conservative and High Growth business plans, one needs £500K investment, the other we’re looking for £1M to scale fast”
However, giving too broad a range without explanation could give far less of a good impression. For example:“Somewhere between £500K and £1M would make us happy”
2. Your Plans for Future Funding Rounds
You should assume you will raise 3 or more funding rounds before you’ll have a self-sustaining business (or be acquired!). However, each time you give away equity in your company, your shares are diluted meaning that you own a lower percentage of your company. If you give too much equity away early on, you may not have very much equity left for future rounds.
Here's an example:
Consider the scenario that you and your cofounder start with 40% of the equity each (leaving 20% for stock options, other team members, etc.) You then give away 30% (i.e. dilute your holding) of the company at each round.
At the end of the 2nd round you’ll have just under 20% equity. And after the 3rd funding round just under 14%.
Founders can easily find themselves reduced to minority shareholders, which probably isn't your plan.