How Much Start Up Equity to Give Angel Investors
By Dennis Valenti
I remember the days starting out as a young Entrepreneur. I had the big idea, a proven concept; I was on my way to getting my first round of funding. After carefully selecting my "ideal investor", there was only one thing stopping me: the email I received back asking how much equity he would receive in return. Inexperienced, I hadn't the slightest idea. Several years later, I can proudly say I know how much start up equity to give angel investors.
There are many factors that come into play when determining their equity share, and I'm here to share them with you in detail.
Equity shares vary from stage to stage.
- Bootstrapping Stage
Any cash you raise in this round should be very minimal, under $100,000. In fact, I advise not getting any funding for this. Investors will frown upon it.
This is what they call the family & friends area. Really, you don't need friends or family; but you do need to put in sweat equity here. This includes doing your own business plan, and sourcing equipment. Please do not waste your time with standard business plans. They don't suite your angel investors. You can view the link to my website at the bottom of this page, to learn more about the right business plan.
- Seed Stage
This is your first stage of financing. The angel investor you choose should carry you through the seed stage, as well as Series A Round; therefore, the equity is negotiable. Some companies bootstrap this stage as well to avoid too much equity being given. The amount you should be seeking is around $100,000. These funds are used to develop your prototype, and hiring initial personnel (if needed). A marketing and operational plan is completed in this stage.
One key point to remember here: the average start up will not receive funding until the Series A Round.
- Series A Round
This is where it starts to get good. You should be seeking somewhere around $350,000 from Angel Investors. Hiring personnel, marketing, and insurance related activities are what you're seeking to fund (i.e., "money used for" question on angel applications). The angel investors equity should be at 35%, reducing the founder's equity ownership to 65%.
- Series B Round
Think of this as your "super bowl" ad. Your start up is gaining customers slowly, and you just need that extra cash to put you on the map. You'll expand your staff, and increase production.
The standard asking amount here is $1,000,000; you can target angel investors or venture capitalists. A small business may never reach this point, but a high growth start up will.
Angel investors will be looking for 40% equity ownership, leaving the founder(s) with 25%. The founders at this point are usually bought out, or replaced with a new executive team (preventing founder's syndrome).
I hope you can now confidently answer how much start up equity to give angel investors. If you're looking for help in finding your angel investor, get it straight from the horse's mouth by visiting my website.
Dennis V. Valenti is the author for http://www.cashtostart.com, part of the Plan to Start Network for Entrepreneurs. Rated one of the top blogs for angel investing, you can read great tips and strategies on how to find angel investors at his website.
Dennis also offers a FREE Integra Start Up Intelligence Report for registered readers at http://www.cashtostart.com
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