How much equity to give an investor

How much equity in the company should a founder give an investor in exchange for investment? This is a very important and painful question for founders, and we are asked it often. I'll try to explain in general terms how we see it. How to calculate an investor's share for a specific amount of investment is covered in a separate lesson. Right now I want to talk about how, in general, to structure the company and its shares so that you reach stable, profitable operations without it coming at the expense of the startup's founders. To do this calculation, you need to picture the startup's fate in reverse, that is, from the future back to today.

A founder needs to understand that they will need investment up until the moment the startup becomes a profitable operating company that earns a regular profit, or until the startup makes it all the way to an IPO, an Initial Public Offering. That is the cherished dream of any startup: to become a public joint-stock company, that is, to turn into a huge company. So ideally, by that point the startup's founders should hold at least 51% of the shares, meaning they should be the majority owners and the main shareholders of their company. Even better, given that they will later transfer part of the shares to their employees and that some unforeseen situations will arise, they should ideally keep 60–70% of the shares in their hands until the IPO or until the company breaks even.

From this it follows that, up to that point, you can give investors no more than 30% of the company. But you also need to keep in mind that nobody gives away all 30% at once. And the main thing is why? Because there will be at least three rounds, and in reality four, five, six and so on. So this 30% needs to be split into at least three parts, assuming that in the first round I give investors 10%, in the second another 10%, and in the third another 10%. That is the minimum calculation. In our experience, that is basically how it has worked out. A founder would usually run the first round to raise money and conquer, so to speak, Kazakhstan.

The startup raises the second round at a higher valuation and for a larger amount in order to cover neighboring markets, and the third round is held at an even higher startup valuation and with a need for an even larger investment, and in this third round the last 10% of this limit is usually given away. That is the big picture; in real life, of course, things are never quite so ideal. Between rounds there is most often a need for small amounts of money, and the founder raises so-called bridges, which are small investments until the next round. Sometimes there are far more than three rounds, but overall I believe a founder should keep these parameters in mind from the very start.

In any case, this will protect them from really gross mistakes, such as when some founders give their very first investor 50, 70, almost 90% of their startup without seeing the bigger picture of how and from where they will later give shares to subsequent investors.