When you know, you know. But what if you don’t know? Splitting equity is a tricky one to tackle and while it doesn’t come with a manual, it’s an important thing to get right (we’ve used this word loosely coz it’s subjective).
When an investor gives you audience and expresses interest in funding your biz, it’s really amazing. You’re almost there. Your excitement builds up but as you hit that adrenal high, you need to tread carefully because this moment could be the make or break of your biz.
The enthusiasm that follows the moment of expressed interest often, and very unfortunately, blinds a lot of entrepreneurs who then end up in a situation worse than an investor’s rejection: A-golden-short-term-deal-cum-raw-long-term-deal.
Investors are amazing people but they are also business people who look to make great returns and are also seeking smart business people to invest in. You therefore need one or two tights grips on guidance in splitting equity. This means looking at various variables that affect your biz directly or indirectly.
Here are some crucial tips from KCB Lions Den:
Resources – and not just the monetary kind especially if an investor is throwing in a huge chunk. This is everything from monetary contribution; relationships; suppliers among other. You could be seeking funding but an established web of connections to peers, suppliers and/or perspective customers is critical and must not be overlooked.
Time and duration – ideally the stakeholders who invest a lot of time in the biz for a long-term plan would be accorded more equity.
Kind of contribution – you know your biz inside out to be able to prioritize its needs. Investors addressing top tier needs would get more equity than those who go for other tier needs.
Valuation – think very carefully about this one. Before throwing a percentage out there, think critically of your projections and how much of that you would be willing to part with.
Detail - you should at the very least retain 25% of your company’s equity. Zuckerberg made sure to do so two years after he founded Facebook. He stuck to those guns to grow the multibillion-dollar company Facebook is today.
Oh, a last one? Unless the unmentionables have hit the fan, actively avoid people looking to buy out your company. They have their eye on a sweet spot in your biz which you will eventually find. All in all, it depends on what kind of entrepreneur you want to be.
Some people like to build and sell businesses, while others take pride in keeping the biz in the family. Whichever path you choose hang tight, sharpen your negotiation skills and do what feels right for your business. Protect your biz with everything in you.