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Hi - I've been meeting with potential investors for an internet advertising network that i'm going to be launching. One of the investors I met with typically is involved with real estate and hospitality businesses. He asked me the following question:
"If i'm investing 20% of the initial capital being raised for the company, why am I receiving 5% of the equity? Shouldn't I own 20% of the company?"
Thoughts?
The value of a company, especially a startup, is more than just the cash required to get it going. There is value in the intellectual property of your business idea. The question should be does his cash investment represent 5% of the total value of the business, after valuing all the tangible and intangible assets.
Best regards,
Molly Donaldson
Molly, I love your enthusiasm but I doubt you would put your money where your mouth is on that one... As an investor, I want to limit my cash's dilution rate when investing in a company. For instance - I can invest $100 in the next Google to fulfill thier capital wishes for 20% of the company and take a net loss in my net worth of $80 while giving the folks I invest in a $80 increase in thier net worth, or I can invest $100 in Google and depending on the way the Street treats me have between $80 and $120 of Google in a year. Let's not overapreciate the value of things yet to be seen. I excpect to take a small discount on my investment in a startup as that is the way venture capital works - 3/4 dilution will never happen even if I am asleep at the wheel. However, Molly - if you put that much value on concepts, I have a few good ideas for you. Rudy, I would take the money and try to make a business out of it. Think of it this way, it is better to own 80% of a venture that has value than a 100% of one that doesnt.
phanio,
That logic is out of kelter!
Investor is investing 20% of necesary capital, and some other investors are investing remaining 80%, so how would You divide 100% of company shares into bigger percentages of ownership? By Your logic OP would be left with nothing, and surely business idea is worth something, else there would be no opportunity for investment nor profit to be earned..........
Now % of shares should be reverse proportional to % of profit that would be earned, because, greater profit means that idea vas more valuable in first place............
So profit is key, and also promise to investor, how much in % he can earn from investment, compared to investment amount. If promised profit is equal to % of profit earned, then Investor is right, he is due for same percentage of shares as is percentage of his investment compared to total investment necesary.
Therefore, Idea owner must position himself as participant in initiall investment with intangible asset of intelectual property, for which he should declare value and include this value as % of initiall investment.
Else, Investors get 100% and he get 0%.....
Actually, OP has to insist that his business idea is worth 51% of company shares, to be able to be in control of his own company.
Therefore, it would be right for that Investor to get little less than 10% of company equity for his 20% of money invested.
Luckily, he seems to be haggling for greater % of company shares, and OP has leeway to offer him 7%, after which he would lower his request to 15% and little by little they can met on 9.5%, and Investor would be happy getting nearly 100% more than at start, and OP would still retain control of his company.
This however has backside, as OP would have to treat all investors same way, else he would be perceived as unfair, and other investors can withdraw from investment.
Alternatively, OP can explain to Investor that there are more investors than good and profitable Business ideas, so he could find another investor while Investor would not find good idea so easily, and that he would get such and such amount of profit, which would be in % that much compared to amount he invested, so if profit is planed at 400%, then investor would get 20% on his money from 5% of company shares....
Also OP can explain to Investor that his idea would bring profit, and without profit even 100% ownership would not be worth anything, clear zero...........
Profit is also something that depend on expenses, and salaries are accounted as expenses, so OP can give himself big salary that would eat up profit earned, but only of course if he retain control of his company, so this us minimum that he can agree that his idea is worth. But in this case Investor get nothing at all...........
But, OP should know how he calculated that for 20% of investment money Investor should get 5% of equity, unless it was whathever came to his mind first so he cannot explain logic of it, in which case he can still haggle.......:-)).
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