How much equity should we sell?May 30, 2022
When we start out with clients, often they haven’t got this figure firmed up in their mind, and that’s ok. It’s a big thing to consider, and entrepreneurs should take some time to consider this in detail.
Every business is different, and the impact this journey has on a business owner can make it all the more difficult for you to give up control.
But crowdfunding campaigns shouldn’t be viewed as ‘giving away equity or control’, they allow investors the opportunity to share in the growth of your business, the future of your idea. You need to be prepared to look at this in the most optimistic light possible, and see it as agreeing to take advantage of investment when the time is right. Even if that means offering an investor a chunk of the business in the form of shares to move you forward.
“An investor needs skin in the game. There’s a natural alignment between the investor and the entrepreneur. The investor wants the entrepreneur to grow and succeed and to get them their exit. The only way they’re going to do that is if they’re adequately incentivised to push, to fight, to drive.”
Roderick Beer, UK Business Angels Association
Whichever type of investment you’re considering (crowdfunding, angel investment, private equity) there are no set rules. You don’t have to look at stats or follow a particular pattern. There is however the need to seek advice on this. You need to think about what allows you the opportunity to do what you need to do to take the business to the next level, without releasing too much equity that may reduce your control over the business? Not easy questions to answer for sure, so it would be worth getting some outside advice. Do you have a board of advisors who help you make overarching business decisions? Do you have an accountant? It would certainly be worth chatting with them to work out what is feasible to you.
You also need to consider the ‘too much too little’ argument. Any less than 5% for example may devalue your campaign and a lot of earlier stage businesses probably wouldn’t give away much more than 20% equity. Releasing or selling too many shares too early could prove difficult in further funding rounds, as shares will get diluted. If this is of concern to you, and those amounts already feel too large, why not consider starting with a smaller round, and releasing a smaller amount of equity, to see how you get on!
Ultimately, valuing your business and deciding how many shares you want to release to investors (who WANT you to do well, remember!) comes down to YOU understanding your business and being authentic about your plans for growth. It’s appealing to investors to see that you’ve given this considered thought, done your due diligence, and of course, considered what your exit strategy and expectations may be down the line.
At ISQ, we can help you with your funding round. We have tools available to help you manage a successful crowdfunding campaign. Get in touch with us if you want to hear more.