How do you decide how much equity to give an investor?
How do you decide initially how much equity to give an investor in order to be fair but not give away too much?
If you then find more investors, do you need to ensure the existing ones retain the same % or proportion of shares? e.g if you give an investor 30 of 100 £1 shares, then issue more shares so there are 200 £1 shares and give 30 to another investor, is that ok or should you issue an additional 30 with the new issue to the original investor so they retain 30% ownership?
Hello Francesca, A very common question that I have been asked many times. The simple answer that many have already suggested here is to obtain a Business Valuation. Always best to have both an intrinsic (to the business) valuation and what is know as a relative (benchmarked) valuation. Once you have a valuation, say $100,000 this is know as a "pre-money" valuation ie the valuation of the business prior the introduction of the investor's money. If an investor then puts in $25,000, then the 'post-money" valuation is $125,000. Investor then owns 25% of the company (25/125) and you own 75%. Sounds easy, however. this is just the start of negotiations with the investor. Have a look at my website for more info. Hope this helps.
As an investor personally, I would first suggest that you first determine your business valuation. Keep in mind that investors not only focus on the intrinsic but also the implicit value of the company. I have attached some links below that might lead you to make a more informed argument on how to approach your specific request.
1. Business Valuation 1: 5 Ways to Value your Business to Investors...http://gbshconsultinc.blogspot.com/
2. How Investors determine the value of your business: https://www.linkedin.com/pulse/business-valuation-how-investors-determine-value-your-edgars?trk=mp-reader-card
As has been previously mentioned you should determine a valuation of the business and then determine how much capital you need to raise. This will tell you what percentage of the business you will need to sell. If you are not comfortable with the percentage you will need to adjust either the valuation or the amount of cash you need.
Typically investment is done in rounds and the investors in each round will all have the same terms. A pre determined number of shares will be sold in the round, and when those are sold the round is closed. They will be buying a certain number of shares, not a percentage of ownership per se; so, as more people invest then they will be diluted or have their ownership percentage reduced. As they are investing in a set "round" they will know up-front the minimum amount of ownership they will have. If fewer shares are sold they will have a larger percentage of the business.
It is also very common (depending on the situation) to raise additional capital in the future, and when this happens they will be diluted even more. It is common for them have a contractual opportunity to maintain their current ownership percentage, but if they want to do that they will have to buy the additional shares in the future. I would NEVER have a purchase agreement that guaranteed that they would maintain the same ownership position without having to buy the additional shares.
You really should consult a finance professional and an attorney before contemplating such a transaction.
Please get a financial consultant to help. This is too technical, it involves:
1. Cost of capital analysis
2. Business valuation
3. Decision on loss of interests and opportunity costs
4. Financing of business and selling of shares are different
5. Relationship between you and the investor
6. Controlling issues in future
My suggestion would be first to set a value on the business. That is easier said than done since setting a valuation is a bit of a guessing game. Sometimes formulas are used such as 1 times sales or 5 times earnings. I will talk more about this in a minute.
Once you have set the valuation take the amount of money the investor is putting in and compute the percentage. For example if your valuation comes out $ 100,000,.00 and he is putting in $ 30,000.00 then give him 30%.
There are other factors to take into consideration. If he is doing nothing but investing cash then the fact that you are putting in time and effort should be factored in. If however he is participating in the business then no.
There are other factors such as the scalability of the business, (how much potential growth it has for example)
As far as can you issue shares and dilute his ownership. No, you can't do that. It is a stock split. So if the value is 100 grand and he invested 30 grand and has 30%. If you started with 100 shares he would have 30,. If you issue another 100 shares he now has 60. You could structure a buyout into your agreement however. For example once he has twice his investment back or three times he gives up the shares or you can structure it that you can buy him out within 5 years for twice his investment or in 10 years for 3 times his investment.
In general around 30% is what investors can get as maximum in my understanding. You can negotiate well based on their investment.