When Should You Give up Equity in Your Business?

At some point or another, all entrepreneurs are faced with the need to raise money to […]

When Should You Give up Equity in Your Business?

Equity in Your Business

At some point or another, all entrepreneurs are faced with the need to raise money to fund their business operations. Raising business equity takes time, energy, and a willingness to let a good portion of your “baby” go.

And at the end of the day, you want to be armed with a keen knowledge of the ins and outs of your company. Think — how much it’s worth, liquid assets vs. equipment, and what you’ll need to keep things on track for growth.

Unsure of how much business equity to keep or give away to investors and co-founders?

Keep reading for tips on how to leverage your business equity or you can download this comprehensive guide to funding from Governments, Banks and other equity capital sources in Canada and the USA.

How Do You Know What Your Company Is Worth?

Early ventures don’t often have a ton of capital to work with, and as such, it’s hard to determine the value of your company. Unfortunately, not knowing your valuation makes it difficult to put a number on how much equity you should plan on giving up.

First-time investors often don’t know if they should be giving up 10%, 20%, or more — and its hard to give a straight answer. Why? Well, it’s likely got something to do with the fact that many startups don’t have a sense of what their companies are worth in the first place.

First, you need to figure out how much money your company is actually worth.  You’ll need to know how much cash flow you have, how much you own in business equipment, and how much debt your business has on the books.

You’ll also needn’t provide some details about your company–what industry are you in, how likely is your company to be around in the next five years, and so on.

Once you’ve got an amount in place, you’ll need to factor in how much other people have already invested in your business.

If friends and family have already put in their own cash, new, potential investors need to know.

Know Your Fundraising Environment

When it comes to negotiating your business equity, it pays to have your finger on the pulse of what’s happening in the market. For example, during the 2008 housing crisis, fundraising was difficult for just about any startup trying to lock down an investment. Tough economic climes may bring lower expectations, which makes sense.

But, you also want to consider the state of your industry. Who are you competing with? There are so many startups on AngelList that call themselves the “Uber of…” anything from food to cat toys. How does your startup stand out amongst your competitors, or are you piggybacking on those who have already made it?

Additionally, if you’re in a crowded space, like say, meal kits, be prepared for disappointment. It’s unlikely any savvy investor will be excited about an idea that’s gone through so many iterations.

Know Your Potential for Success

There are several factors that can predict startup success.

No matter how good you believe your startup is, your track record does come into consideration. A first time entrepreneur with no fundraising experience is a bigger gamble for potential investors. As such, investors may end up taking a higher percentage of your business equity as collateral.

An entrepreneur working in a booming industry may be able to get away with keeping more of their equity. As will a business owner who has experience building successful companies. You might not need a perfect credit history to get seed funding, but your past will be considered.

Business Equity Depends on the Size of the Fundraising Round

The more money you raise, the more business equity you will need to give up. Meaning, if you’ve already gone through the fundraising process, the next round will take more from the part of the business you still own.

Though you might not always have a choice in the matter, you’ll want to do whatever it takes to reduce the amount of money you ask for in any given funding round.

Cut back on expenses wherever possible — work with a smaller staff, seek out cheaper office space or work from your garage. And by all means, skip the “cool startup” freebies like free snacks and happy hours.

Finally, you may want to look for other ways to raise money than looking for angel investors. Maybe a small business loan is more appropriate for your business needs.

Why Might You Want a Loan Instead of an Investor?

There are many, many ways to secure financing for your business.

First of all, an investment is, essentially a loan. The difference between a traditional loan and equity investment is when you’re working with a bank, your credit history and track record vouch for your ability to repay the loan.

With an angel investor, you’re putting up business ownership as collateral. So, if things don’t work out, the investor can claim a certain percentage of your assets as repayment.

A loan may be a good bet for you if you’d like to hang on to more business equity. That said, you’ll need to prove you are a worthy borrower. And if you’re a new startup with no track record, it may be hard to secure a loan.

Need More Help? Contact Pinnacle to Learn More

If you’re concerned about how much business equity you’ll have when all is said and done, you may benefit from working with a consultant.

At Pinnacle, we’ll cover all of your potential financing options and help you figure out if fundraising is the way to go, or if a traditional line of credit makes more sense for your business goals.

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