“Non-voting” stock means an investor will have stock in your company, but not a voice in how you run your business. The basic formula is simple: If you need to raise $5 million, and an investor believes the company is worth $15 million, you will have to give them 33 percent of the company for his money. Draw legal papers for each investor agreement, no matter how small the amount. One key point to remember here: the average start up will not receive funding until the Series A Round. 2 Articles, By Consider offering “non-voting” stock, especially if you are concerned about family members or friends being too pushy in the operations of your business. And, most investors will appreciate that you’ve done some research before you contact them. Consult an attorney that specializes in equity arrangements. Here are a few reasons to consider this type of financing: Angel investors are people who invest personal wealth into specific businesses on an individual basis. Before asking your friends and family for an equity investment, it is important to contemplate your relationship with your potential investor. Equity financing occurs when a business gives up a percentage of its ownership to an investor (or investors) in exchange for capital. These funds are used to develop your prototype, and hiring initial personnel (if needed). Angel investors are pitched all the time; your proposal will only float to the top if you exude confidence and are able to answer all of their questions with little hesitation. Make sure your agreement is clear. Prepare a well-laid-out business plan, and do your homework regarding the valuation of your business and your projections for future earnings. The angel investors equity should be at 35%, reducing the founder's equity ownership to 65%. Equity financing can be a great way to fund your business, provided you have the right type of business. Hiring personnel, marketing, and insurance related activities are what you're seeking to fund (i.e., "money used for" question on angel applications). When an equity investor agrees to invest in your company, they invest in exchange for ownership in the business. I had the big idea, a proven concept; I was on my way to getting my first round of funding. A small business may never reach this point, but a high growth start up will. If you're looking for help in finding your angel investor, get it straight from the horse's mouth by visiting my website. The angel investor makes the $500,000 investment, raising the company’s valuation to $1.5 million. Shishir Gupta Angel Investment, Venture Capital, Idea Validation. Any cash you raise in this round should be very minimal, under $100,000. We will never sell or rent your email address. Really, you don't need friends or family; but you do need to put in sweat equity here. It can be easier to secure early investment from friends and family because they know you personally and can quickly get excited about taking part in your success. The amount you should be seeking is around $100,000. Your email address will not be published. It is understood that if the company doesn’t do well, they lose their investment. Start your search by checking out the following resources: Be prepared for your meeting with an angel investor. The right type of business can really benefit from an equity investor. Inexperienced, I hadn't the slightest idea. After carefully selecting my "ideal investor", there was only one thing stopping me: the email I received back asking how much equity he would receive in return. I have always thought this is such a subjective question that it is almost impossible to give a right or wrong answer, UNTIL I recently read a blog post from back in 2007 by Paul Graham titled “The Equity Equation.” For a numbers focused guy like me, his simple equation to determine whether an investor is worth it or not is the perfect way to answer how much equity to give … This is where it starts to get good. Angel investors are people who invest personal wealth into specific businesses on an individual basis. There are many factors that come into play when determining their equity share, and I'm here to share them with you in detail. Angel investors. Dennis Valenti. “During a first round of outside equity financing, entrepreneurs can expect to give up between 20 percent and 40 percent of the stake in their companies, I remember the days starting out as a young Entrepreneur. If you receive money from your elderly aunt and she dies, will her equity go to her descendants? Friends and family and angel investment typically involve smaller amounts, but can all be considered types of equity investment. How to Project Revenue for a Tech Start-Up. Dennis Valenti | When a venture capitalist invests in a high-growth company, the investor expects to either be a member of the company’s management team or sit on its board of directors, thereby taking an active role in the operations of the business. To save money, you might ask a lawyer who is a family member or friend to help you out. You should be seeking somewhere around $350,000 from Angel Investors. To decide the percentage equity you should give to the angel… Let’s say he assumes your business is worth $1 million and decides to invest $200,000. However, as a target figure, founders shouldn't share more than 33% of equity in seed round. How Equity Financing Works. Be sure to consult a qualified attorney before agreeing to any transaction and treat every investment meeting—even those with your family and friends—professionally. In equity financing, the investor is taking a risk.