When giving a percentage in equity to an investor, is the % taken equally from the existing members of a corporation (partners/shareholders)?
I'm asking this question, as I currently have the lowest % between four co-founders, and would like to bootstrap as much as possible.
If in a majority of vote, a investor is decided to be brought what measurements do I have to prevent reducing my ownership and involvement?
The percentage held of the company depends on how many shares you have. If you have 100,000 shares and your other three co-founders have 900,000 shares then you own 10% of the company.
If an investor wants to put money into the company, the company has to create new shares that it sells to the investor, in return for the money. So maybe, the company will sell 1,000,000 shares to the investor in return for $500,000.
You still own 100,000 shares. The company now has 2,000,000 shares outstanding so your 100,000 shares are now 5% of the company, not 10%. Everyone is diluted proportionally by the fact you are dividing by 2M shares now, not 1M shares.
The only way to make sure you still own 10% is by buying new shares at the same price that the investor pays for them. Hypothetically, the company could issue you 100,000 extra shares 'for free'. This would count as taxable income for you, because that is the same as the company giving you a cash bonus that you used to pay for the shares.
It all depends on how you and the rest of the shareholders want to handle things. One thing to keep in mind (please do your research on this), is that a C corporation can have different classes of stock. By using different classes you can have an investor who owns 90% share of a company (entitled to 90% value of the company) but does not have any voting rights on the direction of the company. This is hard to find, because most seasoned investors know without good voting rights, they really cannot control or nurture their investment. But still smart to look at classes as they are useful for lower level investors (family, friends), and by not giving voting rights to future employees you bring on with stock options.
As for your initial question of how much an investor gets. Say you own 25% of the company, and I own 50% and another guy owns 25%. We assume the company is worth 100k. We want to raise another 100k through an investor (this actually can bring the company value to 200k, because the cash the investor brings to the table increases our value (could be more)).
So now the investor owns 50% of the company (worth 200k, his share is worth 100k). Now I own 25% (half) of the company. (25% x 200k = 50% of 100k).
The example above shows you that when an investor brings money to the table, the value of the company goes up and therefore your share % might go down, but your overall $$$$ value does not.
A couple side notes. As an investor I might put in 100k in your company that you valuate at 100k. You could assume based on the example above that the value would then be 200k, and i would get 50%. But as an investor if i know my money is what is going to make or break the company (critical to its success) then i might value my 100k investment as 900k worth of value for the company. My 100k might be what the company needs to get from beta to an actual profit producing company.
Because investors are smart. Few things you can do to protect yourself in these situations: