Working out how much of your company you should give to investors can cause many sleepless nights. For many, splitting up a new company into shares can feel like it’s being given away – at least in part. One good thing to remember is that a smaller share of a successful company is worth much more than 100% of a non-starter. So if gaining funding through investment is what’s needed to get your company up and running it’s probably worth parting with some shares.
How much of your company should you give to investors?
Stages of funding
When you’re starting your business there are several stages of funding and once you start thinking about sharing your company with others you’ll need to register as a limited company with Companies House.
Stage 1 – Ideas into action
When you first have your business idea it’s likely just you and possibly a business partner or two are involved. If you’re going it alone you own 100% of the company and get 100% of the profits. If you have a business partner you’ll have an agreement in place to say who owns how much of the company – is it an 80/20 split, 50/50 or something else – and subsequently proportions of profits.
Working out this split can be relatively easy as you figure out who is putting in the idea, the most time and the bigger share of upfront capital to get things off the ground.
Stage 2 – Rising costs
As you start to put your idea into action the costs will start to become more apparent and you’ll need to invest in the resources you need to start being productive. At this point, you may need to start looking at gaining funding.
You may look to family and friends to start with and either take their money as a loan or offer a small proportion of your business to them in exchange.
Stage 3 – Mounting money
As the money you need starts to mount you may need to look to professional investors – angels or venture capitalists. Your negotiations with these investors will be tough – they’ve been in this boat before – and there’s no one answer as to how much you should give or how much they’ll ask for, but as a first point of call there is some simple maths that can help:
Take the pre-investment value of your company – that is what it’s actually worth right now without any extra injected into it. Add the amount of money your investor is offering to add into your business. This gives you a post-investment value. Next, take the amount of money that your investor is offering and divide it by the post-investment value you’ve just calculated. Multiply this last total by 100 to give you the percentage share of your company.
So, as an example, let’s say that your company is currently worth £600,000 and that your investor is offering to inject £200,000.
£600,000 + £200,000 = £800,000
200,000 / 800,000 = 0.25 x 100 = 25%
So for an injection of £200,000, your investor gets a 25% share in your company.
Your limited company and offering shares
When you’re thinking about offering shares to gain investment it’s important to know that your company needs to be limited before you can start dividing ownership.
Registering your business as a limited company is easy and can be straightforward and cost effective if you use a formations agent, such as The Formations Company. You’ll benefit from our years of experience in setting up new companies, advice and guidance through the process with everything you need to give us listed for you, as well as cost savings, with your Companies House registration fee all covered by our price.
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