How much equity should I give an investor

Being a semi-successful entrepreneur has this really fun element that you get to advise younger entrepreneurs. This is not something I invented, many other entrepreneurs like to help others

how much equity should a startup founder give to an investor. You want to find really great people to share the journey and give them a lot of equity.

And I am still getting advice from quite a few people. I liked what Joel from Buffer did in that context – he allows any entrepreneur to book 30 minutes with him for free startup advice. Like Joel, I also enjoy helping people and am happy to give away free advice. I can’t tell if my points are worth more than 2 cents but people seem to like them so far.

 

The equity question

One of the more common topics is the question of how much equity should an entrepreneur give an investor. I’m actually not sure why this topic seems important to so many people but I have heard this question in other forms from people who are not entrepreneurs and just want to be nice and look interested.

 

How much of the company do I own?

Well, to be honest what I have in SOOMLA is less than 15%. I have friends who have 100% of their company and really wish they could switch places. If you are a first time entrepreneur, the difference between making a successful company and making an unsuccessful one is so big that it really doesn’t matter how much of it you will end up owning. However, the more you are able to share your adventure with people who can make an impact the better your chances to succeed. To emphasize this point, you can consider 4 situations:

  • Having no investors and no co-founders – this is just foolish
  • Having investors but no co-founders – you will soon realize that this path is very hard to go it alone
  • Having co-founders but no investors – with 2-3 mouths to feed you will be starving
  • Having both co-founders and investors – this is the real path to success

2 by 2 graph showing different equity scenarios. The worst option is to own 100% of the company and the best option is to own the least

 

Who you should give equity to?

The people who have the biggest chance of making your company successful are co-founders. You should look for co-founders before you look for investors and you should give them the biggest chunk of your company. You know you found the right partners when they are willing to quit their jobs to join and at the same time, you are willing to give them an equal share. Once you have a good team going, the next people you want to give equity to is investors who can actually help. Think about guys you believe could run the company better than you if they wanted to. People who already built similar businesses. These are the guys who can give you real advice and can help you bring more investors. Since these guys can’t put real work into the business, they will have to pay for their equity in cash.

But what about the money?

While most founders agree with the rational above, questions like “how much of the company will I own” and “how much money will I get if the company gets sold” are hard to kill. If you have doubts, maybe the you can take the advice of great entrepreneurs such as Steve Jobs or Mark Zuckerberg who both testified that money never mattered to them. Alternatively you can comfort yourself in the fact that the more you get diluted the harder it is to dilute you further. My way of thinking about this is that you need to give equity to build a great company. The only choice you have is who to give it to. Choose wisely.
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1 COMMENT

  1. Great article! Especially first-time entrepreneurs have a difficult time with this question. I appreciate the breakdown you gave and the reminder that it’s more important to have diluted equity in a successful company than full ownership of a failure.

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