As a start-up founder, valuing and deciding how much equity to sell of a company that you’ve put your heart and soul into is definitely not easy. You would need to make an informed decision, and perhaps more importantly be able to justify that valuation to your investors.
Generally, you’d need to make three key decisions:
- How much money should I raise?
- What percentage of the company should I sell?
- What company valuation should I use?
However, there are two approaches that you can take:
- Decide how much money you want to raise, and go forward from there; or
- Start with how much of your company you want to sell and work backwards.
: Decide how much money you want to raise and go forward from there
If your starting point is figuring out the cash you need, then simply look at your monthly burn rate, add in the team members you plan to hire, marketing spend, development costs, etc. and then look at your monthly burn rate again. Now multiply this by the number of month’s runway you need. Remember to factor in a buffer for the unknown as anything can happen and usually does in start-up land!
TIP: Remember to correlate your answer to milestones and not survival, the resources you will need to achieve these and the length of time it will take to get you there.
: Decide how much of the company you want to sell and work backwards
The general rule of thumb for angel/seed stage rounds is that founders should sell between 10% and 20% of the equity in the company since these investors are placing bets on you and are exposed to a high risk / high potential scenario and will likely want a decent slice of equity to get a meaningful return if things go well, and also to have a meaningful level of influence and control of key company decisions if they don’t.
But today, instead of raising a single larger amount in one go which would carry you for 12–18 months, an increasing number of companies are opting for a series of smaller raises giving away 2% — 6% equity per raise every few months.
This would mean that companies can raise fast and more efficiently at any time with this new flexibility in mind.
The real question is whether the 12–18 month ‘go big or go bust’ funding cycle is going to be replaced by the new funding culture where founders can raise capital at any time to meet the company’s needs?
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