Questions

When raising money how much of equity do you give up to keep control? Is it more important to control the board or majority of shares?

Looking to bring on investors to take my company further along. I am nervous about diluting myself to early and then needing more funding which may leave me vulnerable later on.

6answers

It entirely depends on the kind of business you have. If you have a tech startup for example, there are pretty reliable assumptions about each round of funding. And a business plan and financial forecasts are almost totally irrelevant to sophisticated tech investors in the early stages of a company's life. Recent financial history is important if the company is already generating revenue and in that case, a twelve-month projection is also meaningful, but pre-revenue, financial forecasts in tech startups mean nothing.

You shouldn't give up more than 10-15% for your first $100,000 and from that point forward, you should budget between 10-20% dilution per each round of subsequent dilution.

In a tech startup, you should be more nervous about dilution than control. The reality of it is that until at least a meaningful amount of traction is reached, no one is likely to care about taking control of the venture. If the founding team screws-up, it's likely that there will be very little energy from anyone else in trying to take-over and fix those problems.

Kevin is correct in that the board is elected by shareholders but, a board exerts a lot of influence on a company as time goes-on. So board seats shouldn't be given lightly. A single bad or ineffective board member can wreak havoc on a company, especially in the early stages of a company's life.

In companies outside of tech, you're likely going to be dealing with valuations that are far lower, thus likely to be impacted with greater dilution and also potentially far more restrictive and onerous investment terms.

If your company is a tech company, I'm happy to talk to you about the financing process. I am a startup entrepreneur who has recently raised angel and VC capital and was also formerly a VC as part of a $500,000,000 investment fund investing in every stage of tech and education companies.


Answered 6 years ago

You have every right to be concerned. Just assume your project will take longer and cost more than you currently budgeted - even if you already "padded" the costs by X factor.

If you do not want to give up control of your company, you need to control the shares. Board members, including you, can be replaced by majority shareholders - if they all come together and agree.

Do you have a solid business plan and financial forecast?

Consider this...Investors would rather see a request for more capital to do the project "right" than to see a skinny, bootstrapped forecast with the founder living on Top Ramen. The latter shows little confidence while the former shows a well thought out plan.

Give me a call if you have any other questions or want to explore this one further. I offer a free one hour consultation to all first time clients. Just schedule the call with this link:

https://clarity.fm/kevinmccarthy/FreeConsult

Best regards,

Kevin McCarthy
Chief Strategy Officer
www.kevinmccarthy.com


Answered 6 years ago

There are elements of truth in the answers stated here, but my major beef that I keep hearing is the idea that if you give up 51% of the company you give up the control.

Majority percentage ownership of a company has never had anything to do with control! HOW GOOD YOU ARE AT WHAT YOU DO has everything to do with control!

Bill Gates owned 13.7% of Microsoft before he retired. (Now he owns 6.4%.)
http://www.crn.com/news/channel-programs/18810094/bill-gates-net-worth-drops.htm
http://en.wikipedia.org/wiki/Bill_Gates

Michael Dell owned 12% of Dell Computers before he bought the company back in 2013.
http://en.wikipedia.org/wiki/Michael_Dell

Steve Jobs owned 0.63% of Apple from the time he returned to Apple in 1997 until his death.
http://www.forbes.com/lists/2007/12/lead_07ceos_Steven-P-Jobs_HEDB.html

These men’s names are synonymous with who you think of as the leaders of those companies!

Of course it is important to not give up too much percentage of your company too quickly, but business is a team sport and ultimately you’ve got to ask yourself if you want to own 20% of a $200 million dollar company or 100% of a $2 million dollar company?

If you call me I can help you get clarity on what you need to do in order to make those on the other side of the table feel that they'd be CRAZY not to do business with you.


Answered 6 years ago

Probably the most important parameter to consider, even ahead of the business valuation itself, are the terms of the investment contracts and/or shareholder agreements.

In many cases, as sophisticated investors (most of them these days) will want you to keep most of the risk, your control question might become moot.

For a start, minority shareholders (it can be you or your investors for that matter) can have minority protection clauses (veto powers for big decisions like additional funding, divestitures or extraordinary dividends) in the shareholder agreement or company bylaws.

Even if you still have control (>50%) right after an investment, founders (or angel investors) can be diluted if management misses their business plan projections (God forbid!) and milestone-based clauses in the investment contract are enforced.

Along the same lines, sorry to keep taking about worst case scenarios, most investors nowadays have anti-dilution provisions that can exacerbate the dilution of the founder round if there is a valuation "adjustment" in the future.

The later means that, to illustrate how anti-dilution provisions work, even if founders had a favourable Series A valuation, the Series A investors will have the right to adjust the original investment to a Series B valuation if the Series A turned out to be overvalued.

In conclusion, as other relevant comments in this posting, you may want to focus your attention on how much funding your business needs in order to grow... and also in a good corporate lawyer.

https://twitter.com/sergesalager


Answered 5 years ago

I have structured a few hundred rounds of financing in my career, as a founder, an owner and an advisor. There are many tools to keep from being diluted. You can establish that your stock doesnt suffer future dilution. You can sell SAFE until you get to a big Series A. You can limit the antidilution provisions that investors get. Keep in mind that the old adage that its better to have 5% of something than 80% of nothing should guide your thinking in terms of capital formation. If you would like to discuss this further please feel free to get in touch.


Answered 4 years ago

I read your question not about valuation but about control and fear of loss of control.

So it Less about equity % and more about provisions and type of equity. That is you could own 1% but have control of majority of voting shares.
Also provisions can be structured that say "if this than this". That is "if the business is bleeding more or not hitting # for x period or or or ...then capital partners have rights to take controlling vote"

Money in will want assurances to take actions if things aren't going the mid and long term direction it needs (they should know short term varies). When you take invested capital especially from professional money, VC, they have to be responsible for that money as it's often not theirs. When you take money you have decided to take a partner in your asset.


Answered 3 years ago

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