How much equity should I ask for if I am a sole investor in a start-up?


2

I have been asked to be the sole investor in a friends start-up company. The initial investment is $25,000. In exchange, I would like significant equity in the company. How much equity would be appropriate in this scenario?

Equity

asked Aug 31 '11 at 09:21
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David
11 points

5 Answers


2

You deserve a special answer because this is a special case:

  • If your money is all your friend needs for a long time, then something around 10% would be fair. If your friend is really desperate and you are under the impression that your money is the main contribution, and there isn't much work to be done, then you could go as high as 25%, but I don't recommend it.
  • If your money is just a piece of a more serious fundraising effort with other angels, silicon valley VCs, advisory board, etc... then you will need to look at a formal valuation estimate. What you get has to be in line with what professional investors will accept. You may deserve a discount for being early, but it has to be reasonable. That would put you in the 1-5% range, but again, it would depend a lot on the company's growth plans.
answered Sep 1 '11 at 14:31
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Alain Raynaud
10,927 points

1

When calculating equity, you need to put a value to the company.
There are many ways to do this, so the best thing for you to do is do some searching on "company valuation" online.

Generally, equity is calculated based on the post money value of the company.
Meaning, after you invest, how much is the company worth?

For example, say Joe has a company that's valued at $50,000 and wants Bob to invest $50,000 in his company.
The 'Pre Money valuation of the company is $50,000, the post money valuation of the company is $100,000. Therefor Bob's equity share in the company is calculated as 50,000 / 100,0000 = 50%

EQUITY SHARE = Investment Amount / Pre-Money Valuation + Post Money Valuation 

answered Aug 31 '11 at 09:44
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Bwasson
1,162 points
  • I think the asker means how much should he ask for since that person is a **friend**, and he has already known this equation, yet applying it on a startup that has $0 current value means EQUITY SHARE = 25k / (25k + 0) = 100%. definitely not applicable. – Pacerier 9 years ago
  • How do you know the startup has zero value? Sweat equity, and IP count just as much as current revenues. Also, I would argue that there are no friends in business. If someone wants me to invest $25k in a company, I'm going to treat it like any other investment, if you start doing favors for people early on in a business, it can only lead to strife later. – Bwasson 9 years ago
  • Sweat equity is always valued at zero in relation to money. And the rest of your comment proves just that. – Sold Out Activist 9 years ago

1

It really depends what you bring with your $25,000 and what everyone's expectations, for the company and for each other are.

You haven't really given much to go on, so it is hard to give a meaningful answer.

answered Aug 31 '11 at 23:26
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Steve Jones
3,239 points

0

Yeah this is a depends question for sure.

You are putting in the $$$ he is putting in the effort. You are taking more of the 'risk' in my opinion and at some point there may be an option to sell or bring on other investors to get your initial investment back out. Or maybe not.

If you want to be able to say, it's time to sell, or we should bring on another investor, and are going to have an active role in the company then 51% ;)

But if you are just sitting back and your friend is extremely competent then 30%

Y Combinator popular software / web app VC firm gets around 8% for their ~15k investment in startups. But they have tons of apps to weed through and they invest in only the best options. They also hook them up with great contacts and aren't very greedy about it.

I think you should be looking ~ 20% - 30% for a passive role at this stage. Unless you want to control your money and investment, then 51%

answered Sep 1 '11 at 09:06
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Ryan Doom
5,472 points

0

When my startup was funded with $150K, the investors received only 10% of the company. It's less about the amount of money and more about whether or not you are the first to invest in your friend. If you are: 10% is a good starting point. If you aren't, you'll likely get less. Not every investor can receive 10% of the company.

Basically, if your friend is pre-seed, you are his round A and 10% is fair. You can get more, and being your friend, he might give you more just to make sure the shares are in the hands of a friend to prevent hostile actions later on. You can ask for more to cover your risk if you believe your friend will fail or mishandle the money. But then, why would you give him the money in the first place if you didn't believe in him?

answered Sep 2 '11 at 07:47
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Sold Out Activist
414 points

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