How to hold on to your equity
When dealing with investors your business should be looking to
get the best deal. This means keeping as much equity in your
business as you can for as much finance as you can negotiate. This
guide will give you a better understanding of how to hold on to
your equity when negotiating with investors. This guide
explains:
- The negotiation of equity ownership
- Mitigating an investor's risk
- How to get what you want
The negotiation of equity ownership
Investors will make you an initial offer called a 'term sheet'.
It sets out the basic nature of the deal. It will set out what is
for sale and how much they are going to invest for the equity.
These details are not legally binding and they are open for
negotiation. It is advisable to get legal advice during the
negotiations as the language used can be complex.
- Realise that equity ownership is open to negotiation
Mitigating an investor's risk
Investors contemplate risk when they make an investment. The
higher the risks the higher the percentage of equity ownership that
an investor will look for in your business. You need to downscale
the risk and therefore hold a larger equity position in your
business. You can do this by showing an investor how much of your
own money you have already invested or are looking to invest in
your business. This shows your commitment to an investor who will
know that you are not going to walk away if times get tough leaving
them with no chance of a return. You should also show an investor a
sound business plan for the future growth of your company to build
even more confidence and less risk.
- Find a way to reduce the risk of investing in your business and
hold on to more equity
How to get what you want
If you have a choice of investors it becomes easier for you to
decide which one to go with and the terms you are willing to
accept. You are in a stronger position if there is more than one
offer in front of you. The negotiations will be emotional as you
are on the verge of giving up some control in the business you have
grown from a start-up. But you must be confident. You are equal
partners. The investor wants something you have and vice-versa. Ask
yourself if an investor is offering enough for the size of equity
they are after. Don't be intimidated and go for the first offer you
receive. If you are not happy with the equity share then walk away
and wait for a better offer.
- Enter the negotiations with caution knowing what terms you are
prepared to accept
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