Angels are not angels, and VCs are not Very Cordial when they tell you how much of your start-up they want )in exchange for the cash and time and effort they are going to put into trying to make your new enterprise a glorious success.)
So how do you know if you have a good deal or fair deal or terrible deal?
- You can ask other start-up founders
- Ask your lawyer
- Ask your CPA
- Ask other angels and VCs
- Or, do your own plan and stick to it.
Here is a simple way to plan for your deal:
- Start with you (and any co-founders) owing 100% of the start-up.
- Set aside 20% of the stock for options to be granted to future employees. Assume it must last for 5 years (off hiring employees).
- Plan the number of rounds of capital raising you will need to get to cash flow breakeven (over 5 years, to IPO time).
- Put a price per share on each round of financing, starting with the seed round, so each successive round has at least a price per share double the prior round. Overall, the average the investors aim for is 10 times their money over 5 years (much more for the seed round, much less for the last round).
- Since you have determined the cash raised in each round, you can now calculate the number of shares to issue to each round of financing. These shares will "dilute" your and the employee's percentage ownership.
- Now you have a complete picture of what is going to happen to the ownership of your start-up.
- Go back to step (2) and set aside shares for each of the vice presidents and first key employees. Be sure you have enough to make them very rich.
- Return to Steps 3-5 until you are satisfied you have a financing plan that you see as fair or good or whatever you choose to call it.
- Use your plan in negotiations with investors, they'll respect you for it, and give you a better deal.
BOTTOM LINE: Do your homework before raising capital. Be sure you have enough shares for the employees you will need to hire. Plan the cash you need and the shares for those investors. Now you know what percentage of the company you'll own over the march to IPO. Such a plan is part of building an unfair competitive advantage.
I wish you The Best on your Adventure!