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:
http://www.ownyourventure.com/equitySim.html
Gust Launch can set your startup right so its investment ready.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.