Hello friends and welcome back to another edition of my newsletter, where I share lessons from over 25+ years of experience as a product and finance executive, with $300M in product launches and over $800M in funding.
If you are just getting started in your fundraising journey and want to set yourself up for success, check out my Startup Funding Toolkit by clicking on the button below.
No investors, no startup. How to avoid giving away too much startup equity.
It’s not uncommon for the startup founders to be hesitant to give investors equity in their startup. I’ve even been hesitant in the past.
However, if your venture is one that is going to need capital to scale, then getting comfortable giving away equity to investors is a must.
Giving up equity is often a necessity. By taking on investors you:
- add fuel to your growth because you now have expendable capital that can be used to acquire talent, invest in marketing, and speed up product development.
- get a 1+ 1 = 3 effect because investors often bring more to the table than just capital. The right investors will have domain expertise and connections they can share.
- spread the risk of growing a startup across more than just the founder’s shoulders.
If you are honest, what you are nervous about as a founder is giving away too much equity. There are two main scenarios that cause this type of concern. First, inexperienced founders don’t know how much equity they should be giving away. For example, last week I got a message for a first-time founder where the investor had offered him his first funding in exchange for 80% equity. He wondered if that was a good offer. It’s not. Second, founders worry about losing control of their business. When an investor has a majority of the equity in the startup they often own the Board, which can fire the founder as CEO. Unless there the founder has super voting rights.
I’m not suggesting you should give away your equity lightly. But, you need to shift your perspective.
- Try thinking of taking on investors as a partnership.
- Focus on the valuation of your startup, that determines how much equity your investor’s get, unless you use a convertible debt instrument.
- Pay attention to more than just the equity you are giving up. What other terms and conditions were included in the term sheet? Is the investor asking for additional voting rights, liquidation preferences, etc.
Your best defense isn’t being tight-fisted with your equity. It’s picking the right investors.
- Be selective in the investors you choose to take on. Do they understand your vision? Do they see this as a partnership or just a business transaction?
- Communicate openly with your investors. While scary, its best to always be transparent with investors. That’s how you build trust with one another.
- Set clear expectations. For example, talk about what scenarios would occur when an investor might feel like they have to remove you as a founder. After all, if you are failing, consistently, then even you, as the founder, should consider hiring someone else to run the venture.
There is one more way to protect your equity. It’s the most important method.
That’s to time your fundraising activities well.
Avoid raising equity too early and before you have accomplished as many milestones as possible. This ensures that you have traction. The more traction you have the better your valuation. The better your valuation the less equity an investor can command.
What I’m consuming
I had a doctor’s appointment this week, and I’m happy to say that I am at my lowest, leanest weight (183.4 lbs.; clothes, shoes, and all) since my fighting days. Not only that, but I’m feeling the strongest I’ve ever been. What’s the difference? A few things.
My diet is cleaner that has been in a long time. Not because I made that conscious decision. But, because my overall health depended on it. You can read more about that here.
The other change is my workouts. I used to be a cardio machine, but that gets harder as you get older and comes with more injuries. So, I’ve shifted a lot of attention to strength training. Particularly natural body weight exercises and kettlebell training.
On the latter, kettlebell training, I’m only a week into it and I’m hooked!
If you are intrigued, get a kettlebell (I started with 25 lbs., but I’ve lifted weights for years) and check out this video.
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