How Much Ownership Should An Investor Get?

In a perfect world, you’d assume 100% ownership of your business, be blessed with the 5 skills of an entrepreneur, and work under the expertise of a renowned startup founder mentor. With all this in place taking your business to greater heights is guaranteed. 

But we don’t live in a perfect world, and sometimes, bringing an investor on board is the only way to take your business to the next level. In fact, you may need investors to get it off the ground in the first place! The conversation around the amount of stake to give an investor is nothing less than controversial. It often feels like you're giving up a part of your company, which in essence, you are. 

But as this may be necessary for business survival, how much ownership should an investor get? Given the complex dynamics involved, there's no umbrella percentage to offer. It’s more of a case-by-case situation and depends on several factors, such as the type of investor you approach and their liquidation preference. Equity and valuation are essential to consider as well. Of course, the cash flow and attractiveness of the opportunity make a difference too. 

Based on our research, you’re likely to part with between 10% and 20% if you're first starting your venture. However, in certain instances, you may even need to go as high as 50%. Let’s look at some of the determinants for how much ownership an investor should get.

The Different Types Of Investors

When looking for an investor, you have a few options to explore. You can either go the angel investment or private equity (venture capitalist) route. Depending on the type of investor you approach, they come with their terms of how the deal will play out. In most instances, angel investors typically ask for between 20% and 25% return for investing in your business. On the other hand, venture capitalists usually ask for even more depending on how risky the transaction is. 

For instance, if your business product is still in the development stages, they may ask for up to 40% because of the high risk involved. Regardless of the investor you choose, remember that you're likely to be stuck with them for the foreseeable future. So make the right pick. That may mean not settling for the first offer you get. Do your research.  Check if you share the same vision, whether they want to run the company actively, and if they're in it for the long haul.

Equity And Valuation

The type of investor you pick will undoubtedly influence the percentage of ownership you're likely to give up. However, you must understand that investors seldom throw these percentages around without looking at the facts and figures. You should probably do the same to ensure you're on the same page. To a large extent, the value of your company should determine the amount you offer. For instance, if you agree to give an investor 10% equity for $200,000, you’re implying that your company is worth $2 million. As such, it's essential to evaluate your business before approaching an investor. 

In addition, the more money you need to raise for your business, the more equity you'll have to give up. So, by all means, try to start small to cut down on the funds you must raise. If it means looking for cheaper office space, working from home, or initially sticking to a skeleton staff, you should do so. 

Cash Flow 

Take your cue from the business cash flow before signing on the dotted line. If you give investors a high percentage, this will often translate into a financial problem for you down the line. That's why it's imperative that you provide an offer after considering your current and projected cash flow. Whatever you do, don't seal any deals out of desperation. You may wind up offering a higher stake in your company than is necessary.

Summing Up

Knowing how much of your company you’re willing to offer in exchange for a cash injection is a great start. But after all is said and done, you don't need to be too aggressive with your negotiations. Just be sure that you undertake some proper research, so you can make and accept sensible offers using the facts and figures on the table. Get an accurate valuation of your business, take note of your cash flow, and know which investors to approach.