“How much equity should I sell to an investor in exchange for $500,000?”
That is what a reader asked me in an email this morning. It’s a great question with a complicated answer. Most of the time people start calling their MBA friends to get help with a “Business Plan” or their CPAs to ballpark a number that is based on piles of assumptions. We are talking about startup funding here! There is very little “fact” for your CPA to ingest and hardly any patterns for a business planner to forecast. The bottom line answer is “it depends.”
But, hey! Don’t get discouraged! You will arrive at the right number if you get some experienced counsel from other startups and un-interested investors. In the meantime, get creative and save some of that equity. Many, if not most, investors want other stuff besides just equity. They are real people like you and me. They have real stories, real passions, real fears and real relationships. Sell them some equity and a whole lot of real life.
Here are seven things investors value other than equity:
- Passion: A love for the cause that reaches much deeper than the bank vault.
- Control: Board positions which can give them voting rights even if their equity ownership percentage is low.
- Mentoring: A chance to pass the baton to a new generation of entrepreneurs.
- Profit: A plan that may include more rights to profit for a fixed number of years rather than a greater share of equity.
- Influence: The leverage to move another deal forward because of the involvement you give them in your business.
- Pride: Bragging rights out on the golf course, naming rights on a product, or speaking opportunities as a spokesperson.
- Thrills: We are all entrepreneurs. We like the thrill of the chase and the feeling of risk. Believe it or not, that is worth money.
So, get out there and get to know your investors. You will be surprised who they really are and what they really want to buy. Sure, some equity is usually involved in any deal but you may be surprised how little is actually required to close a deal.