That depends. It always comes down to the deal. Ultimately, the investor is going to share the risk with you.
Think about it this way…
You’ve got some time, expertise, a lot of dreaming, a lot of work, a lot of sweat equity, maybe a lot of your own money at this point that’s been put into this deal. The more you’ve put into it, the more valuable the investment is potentially worth and the more you can say “Hey, I’ve already got a lot in here – I can’t share the majority of it with you.”
Alternatively, if it’s just you and your great idea and you’ve only put in a couple months of work and $10,000 of your savings, then if you’re looking for $500,000 from an investor to really take this thing somewhere, that investor is going to get quite a bit of your business. That investor might actually get upwards of 50%, maybe even more. Big, scary thing. It is. I understand.
Let’s say you’ve put in $100,000 of your own money and you’ve been working on it for two years and you’re going to get $500,000 from an investor, well now you’ve got more sweat equity. You’re probably a lot farther in the market, you’ve got a lot of your own assets in there already and that investor may get 10%, maybe 5%, maybe 20% or 30%. It depends on where you are and what your market is, but that equity is going to be a lower percentage.
Be prepared to know that if you really throw in a lot of your own resources (time, money, and assets like computers and your own vehicles or buildings), that raises your value.
Income versus combined investments
Another way to look at it is after the investment check is written and deposited in the bank account, how much of that company’s value is the new cash you just received versus what’s already been built and where it’s going.
If you can say this company is producing some income already, it’s making $100,000 a year, that’s the money you’re probably going to keep making even without the investor (in theory, it depends on your deal). If it’s not making anything, then the company is not worth much and over the next year, their pile of money is really where the value lies.
So, look at the investment and see what its worth after the investment dollar you’re asking for is put in there. If you sold the business the next day after the investment was put in, what would the company be worth and who would get what part of the pie?
You can also look into the future…
Investments are about selling the future. There’s no such thing as betting on the past. The past does not repeat itself. You can’t guarantee the future. Nobody can. But, look out six months, three months, a year, five years and try to value that investment that way. What’s the company going to be worth after they invest in it and a year goes by? At that point, is it reasonable to think that 50% of the value would be yours, 50% theirs? Is it reasonable to think that 90% would be yours because the value of the company is going to go up so high that theirs is going to be worth only 10%?
There’s lots of ways to look at it. That’s just the basic theory.
