I watch a lot of Shark Tank and Dragon's Den and I was wondering what are the consequence to give away lower equity than expected?
For instance, let's say my company value is 200k and I'm offering 20k for 10% equity. What are the immediate and future consequences of accepting a deal for 20k for 50% equity?
Thank you in advance for your enlightement.
The comments are already making this clear, but as an overly simplified answer:
Immediately you sign the deal for 20k at 50% the following two things happen:
Your business valuation has dropped from 200k to 40k and you now only own 50% of the equity.
For the knock on effects: Let's assume you burn that 20k pretty rapidly, you're going to want to raise more funds, and that's going to be hard to do, because, a) your company has a low valuation, and/or b) there's not much equity left to give away.
Let's say you're prepared to give up another 25%. You won't be able to offer a follow on round to your existing investor under the same, or slightly improved terms. They're unlikely to want to completely dilute/divest themselves to start again.
You might be able to argue that this 25% is worth another 20k to a new investor. You're unlikely to be able to convince anyone to spend 200k - because of the deal you already did. So, now you're going to need a lot of dilution on the first investor, as a minimum. More likely is that your new investors will want to see the previous investor bought out, or diluted and re-investing.
And even if you manage to pull all of this off, you'll now own 25% of your company, which still isn't worth anything substantial - with no decision making power, and you're likely working for nothing, with nothing coming in the future.