How do I determine angel investor equity?


3
I have an opportunity to purchase a company. We're still working on the purchase price, but let's assume $100K for purposes of discussion.

I do not have $100K. I would need to find an investor to help me with that. And I have one - I have an angel investor who could provide the $100K. Truthfully, I'd probably need something more like $125K because there would be some costs associated with the purchase, getting spun up, etc.

Here's my question: How do I structure the equity for that investor? If the company is demonstrably worth $100K because that's what I'm going to purchase it for, can I reasonably offer the investor partial equity?

For example, I'd like to offer the investor 49% of the company. My thinking (and please set me straight) is that the company is worth $100K now, but after I purchase it, it will be worth more because I'm involved. ( I do bring significant value to the company. My background, expertise, and ability to execute offer an extremely high likelihood that I will grow the company significantly - well beyond 2X. )

Is there a difference between what the purchase price of a company would be, and its valuation for investors? Or are these the same? For example, the purchase price might be some multiple of monthly profits (EBITDA). But from an investor's standpoint they're making an investment with the assumption/hope that the value (and thus their investment) will increase over time (presumably because I'm involved), so is it appropriate to value it for an investor on a higher multiple?

I care deeply about structuring this in a way that is fair and reasonable - I'm just trying to sort this out. I could alternatively take out a loan for the full amount, but I would love to have the investor involved, and he'd love to be involved.

Investors Valuation Purchasing Angel Investors

asked Mar 31 '14 at 17:58
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Carson McComas
1,023 points
  • Great question. On a side note, I think there is a bug in formatting when you post a question. Answers are just fine, but questions lose their formatting upon posting. – James Thompson 3 years ago
  • Yes, there is. I saw that and edited to hopefully improved readability. – Carson McComas 3 years ago
  • This will be fixed and live in a few hours. – Nishank Khanna 3 years ago
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2 Answers


3

Interesting and unique question.

I'm going to put myself in the investor's shoes and try to answer this question.

As an investor, if the key value in this deal was the business itself, I would invest in it without your involvement. So I'm assuming both you and the investor agree that the business has value and can be grown far beyond what the current founder has done (or is able to).

So the biggest thing I'm investing is not the business, it's your ability to grow that business. As such, being able to negotiate controlling equity should be possible.

The key thing to note -- it's an early stage startup. Valuations for businesses this size are based slightly more on the future potential than a multiple of the EBITDA.

Depending on your previous track record and confidence the investor has on your abilities to grow this business, 49/51 would indeed be fair and doable.

PS. I'm sure you are, but just in case -- you are going to be on a vesting schedule, correct?

Update:

If the value of the business is significantly more than the $100K you mentioned for the purposes of this discussion, then being able to take controlling equity would be harder to sell to the investor.

Also, if you're confident about being able to grow this business, put in a small amount of your own money as well. Having skin in the game is a good way to reduce perceived risk for an investor.

answered Mar 31 '14 at 18:22
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Nishank Khanna
4,253 points
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1

Depending on your risk tolerance, you should put in some of your own money as @Nishank has suggested.

Buying the company entirely with a personal loan would be quite risky. A better option is going 50/50 (in terms of money invested) with the investor. In that case, offering the investor 25% equity in exchange for half the investment would be fair.

A much simpler calculation that would make everyone happy.

  1. Each of you invests $50K each for 50% equity.
  2. Since you would be the one doing the work, you get 25% on top of that. Thus making the structure 75% for you and 25% for the angel investor.
answered Mar 31 '14 at 18:40
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Gonzalo Patterson
136 points
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