When I talk to entrepreneurs that are in the process of raising money I always like to ask “what percentage of the company are you looking to sell to investors?” Inevitably, the answers come back all over the board, often ranging from 20%-35%. Entrepreneurs also like to quote a range when it comes to how much money they’re raising e.g. we’re raising $2M-$3M at a $4M pre-money valuation.
Here are a few thoughts on what percentage of the company entrepreneurs should sell to investors:
- Entrepreneurs should raise enough money to run the business at a certain scale for 12-18 months in order to hit a major milestone so as to raise more money or achieve modest profitability
- Startups often require multiple rounds of financing, so it’s best to think about selling part of the company at each step in the process, and what that looks like in terms of dilution
- Some investors will “require” a certain percentage of the business to be worthwhile for them to invest — this is a game that should be avoided, if possible, as investors are flexible as to what percentage of the business they’ll buy if they believe they make a large return
- One school of thought is to raise as much money as possible, whenever possible, as you don’t know when fundraising will dry up, and to not worry about dilution (I don’t subscribe to this but others do)
The best answer to the question is that entrepreneurs should sell as little as possible to investors while still raising enough money to hit the next major milestone. In reality, entrepreneurs usually sell between 1/5th and 1/3rd of the business with each round of financing.
What else? What are some other thoughts on how much of the company entrepreneurs should sell to investors?