Let’s imagine that you are a brilliant entrepreneur. You get your eureka moment with an idea that can help people. You do everything in your power to create the product or service. Or, at least a prototype. You test it with potential buyers and you have a business plan all set and ready to go. Awesome! But one problem exists: You don’t have any money to get this idea onto shelves across America. Depending on your ideas and ventures, it can cost a lot of money. Equity is one of the best forms of capital if you are looking to have a startup business as an alternative form of payment. Use these ten tips to avoid giving away too much equity.
1. Seed Capital
What you need to do is look for something known as seed capital. Seed capital is money that helps secure your business, but in return, the investor gets equity. While this sounds daunting, it is actually a common problem for most novice entrepreneurs. Luckily, investors can be an easy thing to find, if you know where to look that is.
2. Negotiation
Now, once you get your investor, here comes the real big problem: negotiation. What this means is compromising how much equity is in exchange for money, also known as capital. If your business has not even started yet, then the investor will probably want a big chunk of equity if they are putting so much capital into your company. It makes sense. It is business after all.
3. Ownership
Now, technically, you can, with all intents and purposes, give away 100% of the equity for 100% of the capital. It is not unreasonable, and it is something that happens in startups. The con is that you would no longer be an owner, you would just be an employee there. So, since the business was your idea, you probably want to have a say in the company as its reputation can come back to you. Plus, you would have no say in what direction the business goes. In all, it sounds like you have little reason to be there then if you have no input. It is best not to give all that equity out of the gate.
4. Different Offers
The good news is that many venture capitalists and investors prefer to have “you” retain most of the stake in the company. Instead, they probably will want a different offer such as a key position within the company like a board member.
5. Convertible Loan
Or, you could offer them a convertible loan portion rather than just pure equity stock. A convertible loan portion is when a loan will be repaid into equity at some predetermined date in the future.
6. Percentages
A good equity offer for seed capital would be somewhere between 30%-40%. You could even do 49% as you would still have a majority stake in the company. Want to make this easier to track? Check out cap table solutions like Astrella by Equiniti.
7. Asset Financing
Another option rather than equity is giving investors asset financing. Asset financing is when you use a company’s balance sheet assets such as inventory and use it to borrow money to get a loan. The company must then provide the lender with the security interest.
8. Debt and Equity Financing
Meanwhile, debt financing is when your business raises money for capital and you sell debt instruments to people. In return for the money, the buyers become creditors and are promised that their principal and their interest will be repaid. The other way to get capital from debt is to put out shares of stock in an offering in the public setting. This is known as equity financing.
9. Leave Some for Employees
What you want to do is leave some equity back. Why? It is to leave some equity for your employees whether you plan to hire in the near future or if they are already on board. Equity can be given as an alternative for payment so look out for employees that go up and beyond for the company. It is also quite normal for a founder of the company to end up being a minority shareholder. Although, it is different for more family-run businesses.
10. Growth Business
Regardless, if you are a founding entrepreneur and you want a growth-focused business, a good idea is to have a growth business of at least a minimum of 25% for when you exit. The reason? It can make the long hours and hard work all the more worth it and it also helps you have a promising retirement fund as well as more freedom with your finances.
While all of these terms sound overwhelming, they really aren’t. A good amount of the time, most get along and there are little too few problems. However, some people just think differently and may try to exert some control over the company. For example, Apple fired Steve Jobs when the business was not going in the direction it wanted to. This happens, so be sure to keep a quick and open mind to whatever possibilities are out there.
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