From the title of this post, you are probably assuming it refers to the chunk of your company you will be giving up in exchange for an infusion of capital. You would be right – mostly. In addition to giving up equity, start-up founders also give up some measure of control when they raise venture capital. Therefore, the first part of this post will deal with equity; the second part will deal with control / governance. Keep in mind that what i say below is not necessarily applicable to seed capital or early angel rounds – which I will discuss in a later blog post.
How Much Equity Should You Give Up?
Unfortunately, the answer is not something you will typically have control over. Generally, an investor will give a value to the business based on the net present value of future cash flows, then setting its desired ownership percentage based on its target internal rate of return. A big component to this determination will be the level of risk associated with the investment. So if you want to give up less, you’ll need a good valuation…and you’ll need to minimize risk.
How Much Control Should You Give Up?
Unfortunately, this is someting you will also not have much control over. A venture capiltalist will want board seats. They probably will not require control of the board, but they will likely require supermajority voting provisions on certain issues such as spending capital, raising capital, and selling the business. The venture capital board members will also likely require directors fee and reimburesement for travel expenses. Make sure that the number of seats the investor is entitled to adjusts based on percentage ownership; so as that percentage goes down, so do the number of board seats they are entitled to. Also keep in mind that venture capitalists typically bring very valuable wisdom and exprience to the table – so having them on your board is not necessarily a bad thing.