How much equity do my investors deserve?
May 10th, 2008 | by admin |By Kathleen Ryan O’Connor Last Updated: May 9, 2008: 2:41 PM EDT
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(FORTUNE Small Business) — Dear FSB: I have developed a technology I would like to commercialize and I’m looking to bring in partners to help me develop a business plan and seek venture capital/collaboration. What percentage of the company is typical given away in such cases? Assume the company will be an LLC?
- Victor, Las Vegas
Dear Victor: The quick answer to your question is - there is no quick answer.
A multitude of factors can determine what share of the company a partner or investor might get, from the size of their investment to how big of a role they will play in the day-to-day running of the operation.
That said, here are few guiding principles that can help:
If you are bringing in a typical investor, the percentage will generally be a function of your total valuation, which varies greatly from company to company, and the amount of money they bring to the table, says Richard E. Honen, a lawyer with the Albany, N.Y.-based firm Phillips Lytle LLP who specializes in technology companies, angel and venture investing, entrepreneurship and start-ups.
For example, if your start-up is valued at $3 million and a typical investor contributes $1 million, that investor might expect a third of the company.
That’s a very rough rule of thumb for professional investors. Fewer rules apply to friends and family investors. "They don’t care because they are your aunt and they love you," Honen said.
Consider also that you might do two to three rounds of funding, Honen says, so the issue is not how much of the company will you still own after round one, but after round three.
You must consider why you are bringing the investors or partners on board in the first place. In general they should fill a critical need - money or a skill set you lack. That, in turn, will influence how much of a company they get. Honen says you might offer 2% to 5% for a CEO type. But that number becomes much more fluid in very early stage companies..
Ideally you’ll want to retain over 50% of the company, a majority vote, but Honen says 67% is better. That’s because many states require a two-thirds vote to sell the company.
That might not always be realistic, according to Sheldon Frankel, a professor at the Seattle University School of Law who teaches corporate and partnership taxation. It truly depends on where you are in the stage of the company. "If it’s a single untried idea, I would expect the founder would have to give up control of the company entirely in order to lure an investor," he says. But the more you can offer a prospective partner, such as a patent or interest in your technology from an established company, the greater the options.
Another factor is whether the entrepreneur is willing to buy the investor out at a later date. "There is no return for an investor in a closely held corporation until the corporation has enough cash flow to pay a dividend, a suitor comes in or they go public," Frankel says. "There are a lot of possibilities. But at this stage, it’s just possibilities."
You have to look at it like a relationship, Honen says. What matters isn’t so much the rush of a great first date, but how the partnership is going to work several years down the line. "Equity is forever," Honen says.
(Oh, and about that business plan - here is a handy primer on how to write a great one.) 
First Published: May 9, 2008: 2:32 PM EDT
