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Angel Investors: What Percentage of Equity?

Original post by Eric Feigenbaum of Demand Media

Angel investors give startup businesses seed money and the opportunity to realize greater goals. Don't let the name fool you -- angel investors are in it for they money. They're savvy investors who recognize that the high risk posed by a new business entitles them to a significant stake. Entrepreneurs face the difficult question as to what share of interest is a fair exchange for an investor's capital. These days, angels ask for up to 40 percent of the companies they help.

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Ownership Stake

Angel investors usually take between 20 and 40 percent stake in the companies they help. Sometimes the exact amount is determined strictly by negotiation. However, frequently angel investors use a company's valuation as a measure for how much ownership they should take. For example, if a company is valued at $2 million and an angel investor gives a critical $500,000, the company becomes worth $2.5 million. This commands less ownership than if a company is valued at $1 million and thanks to an angel investor becomes worth $1.5 million. The amount of total value the angel investor brings guides the percentage of ownership it gets.

Other Controls

Angel investors often seek ways to safeguard their money. Many require a seat on a company's board of directors and others insist on bringing in their own consultants or executives to help manage and grow a business. This extends an angel investor's involvement and control well beyond its stake in ownership. Some entrepreneurs appreciate the expertise and assistance of their angel investors, while others come to resent what they see as over-involvement and a squelching of their good ideas and direction.

Tough Negotiating

Company founders have to consider their long-term strategy and resources before taking angel investment capital. With every round of equity funding, founders dilute their interest. Angel investors often provide a first round of funding after which comes larger investments by venture capital groups and public offerings. Hardworking founders who want the maximum reward for their monetary and sweat equity should negotiate to give away as little equity as possible to angel investors. Although they should make reasonable consideration for critical capital, offering 20 to 30 percent will help entrepreneurs preserve their opportunities for long-term rewards.

Shop Around

No matter how anxious an entrepreneur is for capital, it's important to shop around for the best deal on equity investment. There are many angel investors -- both individuals and firms -- interested in getting involved in a great business idea in its infancy. Although it can be tempting to take the first offer made, smart entrepreneurs may find that multiple options exist -- some willing to take less ownership stake than others. Some may even forgo asking for a board of directors seat and other control mechanisms in exchange for a check.


                   

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About the Author

Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.


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