What is the “maximum” amount (%) of a startup an investor should have?
Posted by David S. Rose on September 13th, 2012
It’s generally not a good idea for an initial investor to own more than 50% of a company (although there are always special exceptions), because the odds are that by the time the company is fully funded (and hopefully successful), the entrepreneur/founder’s equity will be reduced to such an extent that it will have effectively eliminated an incentive for him/her to continue building the company’s value.
In general, and in a more-or-less-ideal world, companies should be prepared to give up roughly 20%-40% of equity for each round of early financing, where the size of each round is enough for the company to increase its valuation significantly.
So, for example, taking a not-uncommon streamlined case of a company that had a seed round, a Series A and a Series B before being acquired (and for the purposes of this exercise disregarding any option pool), the math for a single-founder’s ownership of a startup would work like this based on giving up 20% each round:
After Founding: 100%
After Seed: 80%
After Series A: 64%
After Series B: 51%
…and like this based on giving up 40% for each financing round:
After Founding: 100%
After Seed: 60%
After Series A: 36%
After Series B: 22%
A really nice visual calculator for working all of this out can be found at:
http://www.ownyourventure.com/equitySim.html
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
Written by David S. Rose
David S. Rose
Founder and CEO,Gust
David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.
Gust is the world’s largest platform and community
for entrepreneurs and early stage investors.
Gust
Gust is the world’s largest
platform and community
for entrepreneurs and
early stage investors.
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