What’s a Good Percentage To Give An Investor? – By A 12 Year Business Consultant

What's A Good Percentage To Give An Investor?

The Fear of Losing Your Company

It’s a chaotic time for new founders and entrepreneurs, isn’t it? On the one hand, you want your project to take off (or at least survive), and you need that investor’s $500k cash injection. But on the other hand, you don’t want to give away too much equity and essentially lose control of your baby – the company you’ve poured your heart and soul into building. So this question worries you, “What’s a Good Percentage To Give An Investor?”

You’ve probably heard cautionary tales of founders who gave away too much equity too early, only to watch their companies skyrocket in value down the line. The story of Roy Raymond, the founder of Victoria’s Secret, is a prime example. He sold the lingerie brand for a paltry $1 million in the 1980s, and it went on to generate over $1 billion in annual revenue just a few years later.

The fear of repeating such mistakes can be paralyzing. You’d be happy if an investor offered a $1 million investment for just 2% equity – that sounds like a dream deal. But you’d likely be stressed if they demanded a 51% stake for that same $1 million. Giving up majority control is a tough pill to swallow after all the sacrifices you’ve made to get this far.

The Perception of an Investor

I’ve been consulting startups on investment preparation for 12 years now, working with over a hundred founders. This question about what percentage to give an investor comes up constantly. Here’s the thing – it’s quite useless to get overly emotional or stressed about it.

From an investor’s perspective, they aren’t necessarily looking at your company as “your baby” that you’ve nurtured. To them, it’s an opportunity, a potential investment that either makes financial sense or it doesn’t. Investors are evaluating you dispassionately based on the numbers and projections you put in front of them.

You might think your fresh idea for a new product or service is worth a trillion dollars (I’ve had potential clients pitch me valuations like that). But the real question is – what makes your $100 million valuation credible and believable, while that trillion dollar figure just sounds fanciful?

Investors have to go by market logic, not the emotional attachment you have to your vision. They’ll look at companies like Reddit, with huge operating losses but valued at $8 billion, or Twitter, generating over $5 billion in revenue yet only valued at $12.5 billion as of 2022. Some valuations simply don’t align with financial realities.

Valuation will tell you what percentage to give that investor

When it comes to determining what percentage to give an investor, you need to forget the emotional aspect of entrepreneurship. Don’t get caught up in rags-to-riches storylines or vaunt your idea as the next billion-dollar concept. A business, at its core, is just a piece of paper with numbers on it.

You could dream up a restaurant concept that you genuinely believe is worth $1 trillion, and try to convince an investor to stake $1 million for a mere 0.01% stake. You could fabricate financial projections that seem to justify that astronomical valuation. But odds are, some part of your numbers won’t align with reasonable market growth expectations. You’d essentially be betting on unprecedented, exponential expansion in the restaurant industry that defies all logic.

The key is to build a valuation model with sound assumptions grounded in reality. If your startup made $10,000 in revenue this month and you reasonably expect $20,000 next month based on actual progress metrics, that’s a good start. But then look at your 5-year projections objectively – how much capital will you need to remain cashflow positive during that period? Lay out your revenue forecasts, factor in your industry’s growth rates, and benchmark against comparable companies.

Create a comprehensive financial model focusing on those elements leading to a logical valuation. That’s what will resonate with investors and make your desired percentage ask sensible. If your model shows a $1 million valuation in 5 years, it doesn’t make sense to ask for $1 million today in exchange for 10% equity – the investor’s stake would only be worth $100,000 in that scenario, making it an awful investment.

Resources to aid you in deciding what percentage to give an investor

There are certainly exceptions where survival cash is needed at any valuation cost. If your startup is in a bankruptcy situation and the only way to keep operating is with a new investment, even an unfavorable valuation is better than outright closure. In those dire cases, you have to make the best deal you can as a salesperson.

But for most entrepreneurs raising capital to accelerate already-promising growth, a thorough valuation model and reasonable equity ask are critical. To help guide you through this process, here are some useful resources:

With thorough preparation using trustworthy guides, you can confidently approach investors with a valuation and equity ask that makes sense for both parties. The negotiation becomes about the numbers, not an emotional bargaining over your life’s work.