The million dollar question! How much of the participation in your business, of the equity of your company, in an initial round of investment? And the answer is that there is no single formula, the decision depends on the characteristics of the company, the market and the entrepreneur’s five-year plans, that is, if he wants to sell it or turn it into a family legacy.
From a technical perspective, when making an investment it must be understood that the entrepreneur will cede part of the control that he exercises over his company. However, in the experience of some entrepreneurs I’ve talked to, the least you can give in the early stages is the best, leaving room for future rounds of investment.
Assign interest in your business to partners
Two keys to consider to do it more peacefully could be:
- Try to dilute yourself as little as possible in a first round, unless the value added by the investor goes beyond the monetary contribution.
- Include sales restriction and share protection mechanisms to encourage the permanence of founders and key personnel of the startup.
The problem of determining the transfer percentage in a first round of investment lies in the complexity of the task of valuing emerging ventures. An entrepreneur once told me that: “Thinking about the value of a company on day zero is a bit of playing alchemist.” However, there is a fundamental premise: to maintain the leadership of the entrepreneur in decision-making until a second round of investment of series B, that is, when it is consolidating.
For this to happen, in the seed capital phase or round, no more than 15% should be transferred and in series A more than 20-25%, with the objective that the entrepreneur maintains 51% in the third round series B .
Use raised funds well
Beyond the transfer percentages, it is important to ensure that the funds raised contribute to closing the next funding stage. Not very effective is having given a small percentage to maintain greater control, if that money is not enough to grow the business.
There are some “clauses” when closing an investment. The first is that the entrepreneur will receive a typical catalog of do’s and don’ts. Before involving an external investor, the entrepreneur is the lord and master, he does not have to render accounts… but with the funds raised that is over, because the expenses go through an imposed control body.
Due to the above, a good technical support helps to plan scenarios and to pre-define courses of action on patrimonial issues, business vision or relevant management. Something that entrepreneurs should not lose sight of is that, while one falls more and more in love with their project, the funds remain in a cold, economic perspective, where what they are looking for is a return. The fund is for your money, which will always have a preference over your money. In these standards, they are going to look for an exit that allows them to achieve their return or at least recover their capital.
In this line, it can be affirmed that there is a first catalog of control decisions, the second is of rights and obligations as a shareholder. You have to be willing to be committed to your project, you have to be willing to relinquish control, and you have to do your due diligence to be able to find a partnera company or a fund that converges on the long-term vision and alignment that you want to give to your company.
At this point in the clauses, we must add the importance of what is known as the positioning of the entrepreneur and it refers to accepting or not giving up little or a lot of control in different aspects of their venture at an early stage. That is why it is very important to have a good lawyer who protects the economic rights of the entrepreneur, making sure that there are no decisions that could harm him. Let him say: “Look, those five things are common, and these five things are very aggressive, you shouldn’t accept them.” It is essential to understand this in order to negotiate with the interested investor.
The second essential aspect is to have a board of directors that makes decisions. In investment rounds, andAdvice is a fundamental factor in all conversations.
If you are still thinking about how to obtain an investment without risking control of your venture or breaking the Partners Agreement, following these recommendations can give you more light and peace of mind to enter without fear.
Luis Antonio Paredes Izaguirre Director of the Entrepreneurship Research Center (CiiE) at IPADE Business School, he is also a professor in the area of Business Policy and a consultant to various companies on issues related to strategy, change management and innovation.
