Questions

When raising a friends and family round, how much equity should be given to the investors?

5answers

Depends.
Case 1 : You want majority shares to be within your close circle.
Well, in this case, your friends and family control over 51% of shareholding. But this limits the amount of money you can raise as Investors only have 49% portfolio in your company. Now, if you want this business to be scaled upwards, this will be a limiting factor. On the other hand, your inner circle will call the shots.

Case 2 : You are ready to give a majority to investors outside your close circle.
In this case, you and you only should control 21% of equity shares in your company. This will increase the fund infusion capacity of investors. But, the risk in this case will be when few investors, together, own majority shares thereby limiting your control.

So, bottom line is all about your control on the company.
Hope this answers your question.


Answered 2 months ago

It should be depend upon Business owner basically but as per my perspective it depends on type of investment. mean to say if investor is angel go for lower one based of fund raise by him/her.
And if investor is active issue twice of Angel investor.

for more details please feel free to request call.

Thanks


Answered 2 months ago

Hi
Good question. Selecting the right investors is one of the most important stages - as investors can make or break the venture. - especially if it's friends and family.

The amount of shares that should be given:
1. A good tactic in negotiations (and this is a negotiation) is to first try and find out what the investors want. It may just be that they were expecting a percentage that you are happy to give, in which case there is no problem (In this case, I would even give a little bit more than they asked for which will positively surprise them - even if it's just one %).

2. Calculating how many shares each founder should get:
There are various factors to take into account. These include: (a) the size of the investment (b) the current + potential value of the company, (c) the added value that the investor brings to the business (such as connections or expertise), and (d) how hard or easy it is to get investments from other sources.
At the end of the day, it's all about value and psychology (both side's feelings and perception of value).
Bottom line:
1. It all really depends on how much value they are giving you (not only financial, sometimes even just moral support goes a long way).
2. Ask the potential investor how much shares they want (before YOU give a number).
3. Have an open conversation with them in regards to each of your expectations.

I've successfully helped over 350 entrepreneurs, startups and businesses, and I would be happy to help you (including drafting the investment agreement if need be). After scheduling a call, please send me some background information so that I can prepare in advance - thus giving you maximum value for your money. Take a look at the great reviews I’ve received: https://clarity.fm/assafben-david


Answered 2 months ago

There are 3 aspects to the negotiation

1. the intrinsic value of your proposition
Here due diligence is undertaken namely upon the idea, market, team and product as well as if any IP can be protected and what traction has been obtained to date.

This is what most people speak about when they talk about valuation, but it does not stop here.

2. Market heat.
Try raising money for a crypto startup now, not many are interested other than enthusiasts. But in late 2018, you were the hottest prospect. So timing is key.

However, my personal stance, is that you should not prepare for market heat. Build in what you are uniquely and comparable advantaged to build.

3. Cash runway.
A startup without cash prepare has time to feel the market, enter into parallel discussions with various investors and may even as a result get multiple offers.

A startup with a limited cash runway? with a few months left, that becomes a buyer's market, where investors have the upper hand.

Basically any startup as of the Covid19 pandemic, has little negotiation power (other than a few exceptions who are winning from the moment).

My experience on this topic is to ensure as a founder you know what you need in terms of ask, and what you want to build and by when. As long as you do not give up to much, you should be willing to compromise on valuation, as long as the other party will be a good partner in terms of providing cash today, creating network and business opportunities and be willing to support future equity rounds, either through investment or at least as an ambassador.


Answered 2 months ago

There is no quick answer to the question because there are too many variables that are currently unknown. There are also many structural options to consider that would impact the amount of equity given in any round, including a friends and family. For example, common equity, multiple variations of preferred equity, convertible debt, and SAFE notes ('Simple Agreement for Future Equity') could all result in different equity positions for your investors.

Which of the structures is most appropriate will vary by the attractiveness and opportunity investment to investment, and will also be impacted by external inputs like market conditions.

I have playing leadership roles on teams that have raised over $150 million of capital through numerous channels including angel, venture capital/VC, public reverse takeover, and private placement.

I have also been an angel investor for 10 years and I am currently part of a VC group that has deployed over $500 million in venture capital.

I'm happy to discuss with you for a free session during the COVID-19 crisis and help anyway I can. You can find the code in my expert listings on my clarity profile.


Answered 2 months ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2020 Startups.com LLC. All rights reserved.