I’ve known many entrepreneurs who have ended up owning less than 20% of their own company. How does this happen? Well, it usually happens because they haven't used “risk and reward” in their favour.
Often, entrepreneurs go out looking for capital way too early, when their idea is still at its rawest stage, and when the risk for investors is at its highest level. Now, if you leave too much risk in the game, ultimately you’ll pay the price of releasing too much equity.
For example, I spoke with an entrepreneur the other day who, for £50k, released a 50% stake in his business. So let’s assume that this entrepreneur needs additional capital later down the line, say another £100k in a year’s time. What’s going to happen is he’s going to release another 20% or 30% on top of the original amount, which then makes him a minority stakeholder in his own business.
But let’s say things go really well for our entrepreneur, and in another year he needs a quarter of a million pounds, or half a million pounds. Now he’s at severe risk of owning just 10% of his own company!
For example, I spoke with an entrepreneur the other day who, for £50k, released a 50% stake in his business. So let’s assume that this entrepreneur needs additional capital later down the line, say another £100k in a year’s time. What’s going to happen is he’s going to release another 20% or 30% on top of the original amount, which then makes him a minority stakeholder in his own business.
But let’s say things go really well for our entrepreneur, and in another year he needs a quarter of a million pounds, or half a million pounds. Now he’s at severe risk of owning just 10% of his own company!
So here are three ways to prevent this from happening to you:
There are many ways to reduce the risk for investors but, ultimately, remember to ask yourself: why are you doing this in the first place? Why did you start this particular business? And why are you doing what you’re doing? I’m guessing it’s probably to do with creating something – something of value, something that buzzes you up. But also, for freedom – for the freedom to do what you want to do. And that freedom won’t come about by releasing 80% of equity in your own company.
So, as an entrepreneur let the goal always be freedom, by de-risking as much as you can and retaining as much equity stake in your own business as possible, especially in the early days.
Find out more about retaining equity and increasing your chances of the best investment for your business at my next event How to Attract the Right Investors on 20th October, 2pm-6pm, at the British Library's Business & IP Centre. Other dates are available. Follow me on LinkedIn, Twitter or Facebook for special offers and discounts.
- You can use the “The Lean Startup” approach, a term coined by entrepreneur Eric Ries, which is all about validating your concept with minimal resources and maximum acceleration. Using the Lean Startup methodology as early as possible will help you demonstrate tangible progress to investors and will increase the potential valuation of your business.
- You can build value in your team. In addition to validating your market through The Lean Startup approach, you can effectively “borrow” credibility from others, for example by establishing an advisory board of respected experts in your field, or by engaging non-exec directors or other executive team members. This will also increase the value of your proposition and “de-risk” it to some extent.
- You can cut out the middleman, and instead of trying to secure investment for a particular purpose, simply go straight to the source. For example, say you need a website that’s going to cost £20k, rather than find an angel investor to put in £20k at a riskier stage, and release a large chunk of equity as a result, go to the web developer and do an equity deal with them, offering a discounted fee structure after that. That way you release less equity than you would to a professional angel, while reducing the risk of further investment in your business.
There are many ways to reduce the risk for investors but, ultimately, remember to ask yourself: why are you doing this in the first place? Why did you start this particular business? And why are you doing what you’re doing? I’m guessing it’s probably to do with creating something – something of value, something that buzzes you up. But also, for freedom – for the freedom to do what you want to do. And that freedom won’t come about by releasing 80% of equity in your own company.
So, as an entrepreneur let the goal always be freedom, by de-risking as much as you can and retaining as much equity stake in your own business as possible, especially in the early days.
Find out more about retaining equity and increasing your chances of the best investment for your business at my next event How to Attract the Right Investors on 20th October, 2pm-6pm, at the British Library's Business & IP Centre. Other dates are available. Follow me on LinkedIn, Twitter or Facebook for special offers and discounts.
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