Raising funding is one of startup's most exciting yet challenging tasks. For most founders, it's a key step to scaling their startup into a sustainable business. At some point, however, you'll face a critical question: How much equity should I give away to investors in exchange for the capital?
Now, this isn’t just a financial decision; it’s a strategic one that affects the company’s control, growth, and, ultimately, future. The answer depends on factors such as your startup’s valuation, funding stage, and long-term goals.
In this guide, I’ll explain what you need to know about equity allocation, highlight the key factors that influence it, the typical equity ranges for different funding stages, and practical tips for negotiating effectively with investors.
TL;DR: Key takeaways from this article
- Equity represents ownership in your startup, typically allocated as shares.
- The amount of equity you give depends on your startup’s valuation, funding stage, and long-term goal.
- Typical equity ranges for seed investors are 10% to 20%, while Series A investors may ask for between 20% and 25%.
- Plan for future funding rounds to avoid excessive dilution and losing control of your startup.
- Negotiating equity is essentially about balancing funding needs with maintaining control of your company.
Understanding equity in a startup
What is equity?
Equity is a company's ownership stake, often represented by shares. In startups, equity is offered to investors in exchange for financial support (fundraising), given to employees as rewards, and used to attract strategic partners.
When equity is allocated to investors, they gain partial ownership of your business. Striking a balance in equity allocation ensures that founders, employees, and investors are on the same page.
How is equity distributed?
Equity is typically divided into shares, which can be categorized into:
- Stock options: Offered to employees as compensation, allowing them to buy shares at a predetermined price based on a vesting schedule.
- Common shares: Standard shares held by founders, employees, or retail investors.
- Preferred shares: Shares often given to investors, offering priority in profit distribution or liquidation.
Key terms in startup equity
- Shares: Units of ownership in a company. They represent a claim on a portion of the company's profits and assets.
- Shares outstanding: The total number of shares owned by all shareholders, including founders, investors, and employees.
- Fair market value (FMV): The price at which one share would sell in the open market under normal conditions.
- Exercise shares: The process of activating the right to buy or sell stock options or shares in a company.
- Equity grant: A method of distributing equity compensation where a company offers shares or stock options as part of an employee's remuneration package.
- Valuation: The estimated monetary value of a company, determined by its financial health, market conditions, and growth potential.
- Stakeholders: Individuals or entities with an interest or stake in a company’s performance, including founders, investors, employees, and customers.
- Retail investors: Individuals and non-professional investors who invest their funds in various financial products, including stocks, mutual funds, and startups. They invest through crowdfunding platforms, stock exchanges, or private equity opportunities.
- Venture capitalist (VC): A professional investor or firm that funds startups in exchange for equity. They typically focus on high-growth potential companies.
- Institutional investors: Large organizations such as venture capital firms, private equity funds, or hedge funds that invest in startups for returns.
- Angel investor: Individuals who provide financial support to early-stage startups or small businesses, usually in exchange for equity (ownership shares) in the company.
- Pre-seed stage: This is the earliest stage of funding, where founders raise money to validate their business idea and develop an initial product.
- Seed stage: The first formal funding stage, where startups raise money to develop their product, conduct market research, or grow their team.
- Seed round: A financing round during the seed stage aimed at helping a startup grow to the point of attracting larger investments like Series A.
- Series A: The first significant round of venture capital funding after the seed round. The funding is used to scale a business model that has been proven at the seed stage.
- Series B: This round follows Series A and is geared toward scaling a startup’s growth, focusing on expansion, team building, and product development.
- Series C: The business is generally well-established and successful at this stage. Funding from this round is used for significant expansion, such as developing new products, expanding into international markets, or even acquiring other companies.
- Market comparisons: A valuation method that compares a startup’s metrics (e.g., revenue, growth rate) with similar companies in the market to estimate its worth.
- SAFE Notes (Simple Agreement for Future Equity): A financial instrument used to raise startup capital. It gives investors the right to purchase equity at a future date, often during a priced funding round.
- Anti-dilution clauses: Investment agreements that protect investors from dilution during subsequent funding rounds.
- Voting rights. The rights of shareholders to vote on significant company matters, such as appointing directors or approving funding rounds.
- Benchmark: A standard or reference point used to measure performance, often used in revenue, growth, or valuation comparisons.
Factors to consider when deciding equity for investors
1. Startup valuation
Before offering equity, you need to establish your company’s valuation. Your company’s valuation is the foundation of equity allocation. It determines the price per share and the percentage of equity an investor gets.
The following are two terms that often pop up during negotiations:
- Pre-money valuation and post-money valuation: Pre-money valuation is your startup’s worth before the funding injection, while post-money valuation describes the valuation after adding the investment amount.
Pre-money valuation + Cash raised = Post-money valuation.
Written by seasoned experts, who have over 16 years of experience in Free Zones development. Learn more.
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For example, a ₦10 million investment at a ₦40 million pre-money valuation gives a post-money valuation of ₦50 million. In October 2024, Nigeria-born fintech giant Moniepoint hit a $1 billion valuation after raising a $110 million Series C round.
- Market comparisons: Look at similar startups in your industry. For instance, if tech startups at your stage are raising funds at a ₦50 million valuation, use that as a benchmark.
2. Funding stage
Your company’s stage significantly affects how much equity you should part with:
- Pre-seed and seed rounds: Investors are taking a huge risk and may expect larger stakes — typically between 10% and 20%.
- Series A: At this stage, with proof of traction, funding rounds often allocate from 20% to 25%.
- Growth stages (Series B and beyond): By Series B or beyond, founders might offer smaller slices (10–15%) because valuations are higher, and there’s less risk.
Please note that these equity ranges are merely guidelines, and the actual percentage or amount startups offer to investors in exchange for capital can vary significantly.
3. Dilution and founder control
Funding rounds can dilute existing ownership. For example:
- You start with 100% ownership.
- A seed round investor gets 20%, leaving you with 80%.
- A Series A round investor takes another 20%, reducing your stake to 60%.
As a founder, you must be strategic to retain majority control.
4. Investor contributions
The type of value an investor brings matters. While all investors provide cash, some also offer mentorship, network access, or strategic guidance. These intangibles might justify a higher equity allocation.
For example:
- An angel investor may ask for 15% but also offer connections to potential clients.
- A venture capitalist offering ₦29 million might request 15% equity but also demand a board seat.
5. Future funding needs
One of founders' biggest mistakes is giving away too much equity early. Avoid over-allocating equity in the beginning, as you’ll need to reserve some for future rounds, employees, and other stakeholders.
Always plan for subsequent rounds. If you sell 40% of your company during the seed stage, future rounds could leave you with little control. Ideally, founders should aim to retain at least 50% ownership through Series A.
Typical equity ranges for different investors and stages
NOTE: These equity ranges are merely guidelines. The actual percentage or amount startups offer investors in exchange for financial assistance can vary significantly based on the specific circumstances of each company, funding rounds, and negotiations.
Seed stage
The percentage and amount depend on the startup's market potential and the capital injection required to achieve the initial milestone. This initial investment is usually directed towards validating the product or service, building a minimum viable product (MVP), and getting traction in the market.
The investors at this stage are typically:
- Angel investors: They often invest in the early stages, shoulder significant risk, and take 10% to 20% equity in exchange for their capital.
- Friends and family: In these early rounds, friends and family usually provide smaller amounts and take about 10% equity in return. Keep these arrangements clear because mixing personal and professional relationships can be tricky.
Series A
This stage sees more substantial investments to scale the business, expand operations, and enter new markets. Accordingly, startups give up more ownership, usually around 20% to 25%. By this stage, the company has proven its product or service and recorded a solid growth trajectory — both of which mean a higher valuation, giving more negotiating power to the founders.
The investors at this stage are typically:
- Venture capitalists: VCs invest larger sums during Series A but often negotiate hard for control, such as board seats and decision-making rights.
- Institutional investors: Companies or organizations with employees who invest on behalf of others usually demand board seats or veto rights along with equity.
Later stages (Series B & Series C)
At the stage where startups have demonstrated their ability to scale, the amount of equity they should give investors becomes less definite. The percentage of equity offered can depend on the company’s funding needs, market position, and growth trajectory.
The investors at this stage are typically:
- VC firms, private equity investors, and other institutional investors. Equity allocations generally reduce to around 10–15% as larger funding amounts drive up valuations. Also, there’s less risk at this stage.
Best practices for equity negotiation
Understand your value
Have a clear picture of your company's worth. Use valuation methods like discounted cash flow (DCF) or market comparables. Being informed helps you defend your terms during discussions.
Leverage SAFE notes or convertible notes
Rather than immediately giving away equity, some startups offer investors SAFE notes. These agreements let investors convert their cash to equity at a later funding round, often at a discount.
Know your non-negotiables
Decide upfront what’s non-negotiable for you. For instance:
- Are you willing to give up a board seat?
- What’s the minimum equity percentage you’re comfortable holding post-funding?
Build trust and confidence among investors
Maintain open and transparent communication with investors. Demonstrating steady progress through key milestones and showcasing growth potential helps you reduce pressure to give away large equity chunks in subsequent funding rounds.
Practical tips for calculating equity to give investors
1. Set limits on dilution
Remember, balancing equity allocation with maintaining decision-making power is vital. Overdiluting your shares during funding rounds can cause you to lose control of your company.
Suppose you start with 100% ownership. After seed funding, you own 70%. By Series A, this drops to 50%, and by Series B, you’re at 30%. While dilution is expected, being left with a small stake can demotivate founders and complicate decision-making.
Allocate equity strategically to avoid excessive dilution. A general rule of thumb is to retain at least 50% ownership through Series A.
2. Negotiate founder-friendly terms
Consider including:
- Anti-dilution clauses: Protect against significant dilution in future rounds.
- Voting rights: Retain control with Class A shares that offer higher voting power.
3. Benchmark against similar startups
Research equity splits in your industry. For example, tech startups often raise seed funds at 10% to 20% equity, while high-risk industries like biotech may give away more.
Equity allocation mistakes to avoid
- Undervaluing your company. Selling too much equity early can haunt you later.
- Ignoring legal protections. Ensure you have shareholder agreements that protect you from being ousted. Seek legal advice at every stage.
- Not planning for future rounds. You'll struggle in subsequent rounds if you raise ₦100 million Series A by allocating 40%.
Frequently asked questions about equity allocation
How much equity is typical for seed round investors?
Seed investors generally ask for 10% to 20%, depending on the risk and valuation.
Is 1% equity in a startup good?
Yes, if the startup has high growth potential. For example, 1% of a billion-naira company is worth ₦10 million.
Is 0.5% equity in a startup good?
It depends on the company’s potential and your role. 0.5% could grow significantly for an early employee as the company scales.
How much equity should I give up in a startup?
Most founders aim to retain at least 50% control through early funding rounds. Avoid giving away too much (more than 25% in any round) too soon.
How much equity should I give in the first round?
Most founders allocate 10% to 20% equity in Seed rounds, depending on the valuation and the investor’s contribution.
Can I negotiate the equity percentage?
Absolutely. Investors expect negotiation. Just endeavor to back up your terms with solid financial reasoning and future growth projections.
What’s the difference between equity and stock options?
Equity represents ownership in a startup, while stock options give employees the right to purchase equity at a fixed price at a later date.
What happens if I give away too much equity?
You risk losing control of your company. Moreover, founders with minimal equity might struggle to stay motivated, make strategic decisions, or secure additional funding.
How do I avoid over-dilution?
Set a dilution limit, implement anti-dilution clauses, and consider instruments like convertible notes or SAFEs to delay equity distribution.
What’s a fair valuation for my startup?
It depends on your industry, traction, and market potential. Research similar companies in your niche to benchmark your valuation.
Conclusion
Recap of key points
Determining how much equity to give investors in your startup is a balancing act. While you want to raise enough funds to grow, retaining control and planning for the long term is crucial.
Final advice for founders on equity allocation
Approach equity negotiations with a clear understanding of your startup's valuation, growth potential, and strategic goals. Above all, seek legal and financial advice to protect your interests.
With the right approach, you can secure the funding you need while keeping your vision intact.
