What is the “maximum” amount (%) of a startup an investor should have?
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:
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
Written by David S. Rose
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