Giving away equity (how much?)
By Permjot Valia
Agreeing to invest in a business is relatively easy. Agreeing to accept an angel investment is not as easy as it involves giving away part of what many entrepreneurs feel is their baby.
The first thing I should say to entrepreneurs is that they should think long and hard about whether or not to accept going down the investment road. Control is a big issue for many of you. But recognise that 51% ownership is meaningless. I have a very simple view, the moment you accept just £1 of external money, you have a legal and moral obligation to run your business in the best interests of all shareholders. I will typically not invest in a company where the management team have more than 70% of a company. No specific reason for that number, but I have found in the past that the business ‘owner’ does not recognise that no matter how small another investor is - they have the same duty of care and attention to them as they do to themselves.
So this is a short post - but I hope an important one. If you accept external investment please remember this means
1) You cannot use the company as a personal bank account
2) Every penny spent has to be to further the interests of the business
3) You have to produce meaningful financial information on a regular basis
4) You have legal obligations to always act in the best interests of shareholders. Especially if someone offers to buy the business!
5) The shareholders have the right to ask you lots of questions and expect answers!
6) You need to have at least one non-executive director on the board and recognise what that means
Having said all of this, most businesses find that external angel investors can add real value to a business and help it grow rapidly.
Let me ask you, would you rather own 100% of a corner shop or 1% of Tesco?
If your answer is the corner shop - because you want control and the lifestyle - external investment is not for you!
Permjot Valia is an established early-stage investor and is on the board of the EISA www.eisa.org.uk, Earlier this year, he also co-founded a Fund Management business called Flight & Partners www.flightandpartners.com which now has around £15m under management and invests in the turnaround sector. These articles were written to highlight his experiences in the world of early stage finance and his full website can be seen at http://www.businessangelblog.com/
1) An interesting article on Venture Giants that ties in very well with this subject is: Free equity for no Angel Funding. This is not a scam from a fraudster but actually an angel investor who truly believes that his or her contribution in terms of time and effort is worth more than the angel capital investment itself! This is a value proposition, and if you are not convinced that this could happen to you, you will find the link to the article above very interesting.
2) No surprise that most entrepreneurs over-value their companies in the start-up stage and either ask for more than they need, can afford or offer less shares than is reasonable and based on real world numbers and facts. To complicate matters worse, most informal angel investors are new at this game and when an entrepreneur throws out a value for their company and shares, many will accept this because they too lack the understanding and knowledge to question this. Then you have the sweat equity factor thrown into the equation and when an entrepreneur says they have just spent the last so many months or years developing their business project and worked this many hours, how will an angel investor verify this? What is your business startup really worth addresses these issues very well.
3) You are at a stage where you have finally agreed on a value your company and have agreed to the amount of angel investment you are willing to accept in return for equity - the final point outstanding is what type of Limited company shares you are willing to transfer to an Angel investor. Though your solicitor will assist you on this topic, it is crucial for an entrepreneur to be able to understand the differences between limited company shares. The article discusses this in more detail.
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