One of the most difficult decisions for startups is whether or not to sell their company when they’ve hit a growth-stunted plateau. If you’re smart, you’ll fund-raise until you find a VC willing to fund your next round. But even with this advice, there are bound to be hiccups along the way. No matter how much capital you raise or how many investors you acquire, some funds will always be out of reach for your business. This is where equity in your startup comes into play.
Whereas you must have encountered numerous difficulties in your search for angel investors and venture capitalists, to whom you will be required to give away chunks of your company’s equity one at a time, allocating start-up equity is an additional problem. When asking for investment money, most venture capitalists will only consider taking equity in return. However, this can be a significant downsizing for startup founders who have little or no experience operating an organization.
In this article, we’ll go over how to give up equity in your startup when seeking funding.
1. What Is Equity In Startups?
Equity is the amount of money that a startup owner gets in return for investing their own money. Equity can come in many forms, including ownership in the company, profit from its future earnings, or a combination of these. The return may come in the form of payment or a gift. The term can also be applied to the equity obtained by an employee upon the termination of their employment, or to a group of people who have collectively invested in a startup. This group of people is called an “equity pool”.
2. Why Is Equity Important For Startups?
If you’ve ever been in a startup, you’ll know that the fundraising process is often nerve-wracking. If you don’t think you have the right amount of cash to make your startup profitable, you may have to choose between raising more money or sacrificing profitability. It can be extremely difficult to justify the price hike to existing customers and the cost of an expansion beyond what you believe is necessary.
With equity, you can offer the funding you need to get to your goal, but retain ownership of the company when it’s done. Because equity is a “down payment” on the sale of the business, it’s often very attractive to acquire a strategic acquisition tool for early-stage companies.
3. How To Get Equity In Your Startup?
There are a number of ways to get equity in a startup, including equity-for-becoming-a-employee, equity-for-acquiring-property, equity-in-the-founder-baby, equity-in-the-equity- pooled company, equity-in-the-forgotten-investor, and equity-in-the-unsung-VC. Some of them are easy and some require a bit of effort. The following are the easiest ways to get equity in a startup.
- Equity-for-Becoming-a-Employee – This is the most common equity-for-startup-equity-for-becoming-a-employee exchange. The founders agree to make themselves available for employment by the company at a set salary for a period of time. If the company is successful, it’ll likely want to increase its pay package. The founders can either accept a pay cut or accept a later offer to purchase their stock at a higher price.
- Equity-for-Acquiring-Property – If you own real estate, this is a great way to acquire equity in your startup. If your company acquires property, you can give the equity to the new owner as a form of “thanks” for helping you get started.
- Equity-in-the-Founder-Baby – This equity-in-the-founder-baby exchange is often used when the founders of a company are relatives. The founder can give some of their equity to the baby, or the company can take ownership of some real estate as part of the deal.
- Equity-Pooled Company – This is probably the most common equity-for-startup-equity-in-the-equity-pooled-company exchange. The founders of the company pool together some of their equity with other ventures that have been funding the same company for a period of time. If the financial conditions of the companies are good, the founders may decide to sell some of their shares to raise funds for the transition to a publicly- traded company. This is often done through an initial public offering or IPO.
4. Pros And Cons Of Equity In Your Startup
There are a few things to consider before deciding how to get equity in your startup.
- Cost of Equity – The most important thing to consider is the cost of equity. You’ll want to shop around to different funds and see what they charge and what the return on their investments is. Be realistic about how much equity you want to offer and how much you can afford to give up in return for more funding. However, if you’re the type of person who wants a “no-brainer” investment, the following are things to keep in mind.
- Retention – If you have limited experience running a business, it’s very difficult to retain employees. You’ll likely have turnover and need to hire new people frequently. This could result in lower revenue and profits. If you don’t mind this hit to your bottom line, retaining equity could be worthwhile.
- Mapping Out the Business – Before you make a deal with a fund, it’s a good idea to map out the business and find out what their estimation is for the total value of the business. Be sure to account for all of the costs that will be incurred, such as the cost of capital, financing, and taxes.
Equity in your startup is a great way to get funding when you’re seeking to grow your business. It can be used to acquire additional financing when you don’t have the cash to fund your next round of funding. You can get equity in exchange for investing your own money in your startup. Some companies will give you ownership of the company when you invest in them, while others will give you profit from the company’s future earnings.
When you get equity in a startup, you’re really giving up some control over your company. You might control some of the shares, but the rest are in the hands of a third party. This is why it’s important to consider the cost of equity when securing funding for your next round of business.