Many entrepreneurs needlessly trade away equity in their startups in exchange for capital. But in the end, the more equity you can maintain, the more profit you’ll see from your business. Luckily, there are a number of ways to keep more equity in your business — even if you seek investor capital. Here are five to consider.
Use Milestone Raises to Prevent Excess Dilution
If you were to take all of your investment capital in one lump sum at the beginning of the process, your ownership in the company would be needlessly diluted. That’s because investors consider risk to be the highest before a company reaches goals or milestones that prove its value, and so they demand more equity in exchange for their capital. To combat this dilution, consider breaking up your funding rounds to coincide with predetermined milestones, which will increase the value of your company. The more valuation your startup has in each round, the less ownership you will have to give to investors. Some common milestone raises happen when the founder makes an important hire, launches a product, attains a certain number of customers, or reaches a specific sales amount.
Use Bootstrapping Techniques Instead of External Capital
Not all entrepreneurs need to raise outside capital to get their business up and running. Bootstrapping is one way to fund your startup without giving up any equity. Bootstrappers use their own cash and resources to fund their company, and then keep costs low. For instance, you may use your savings or credit cards to purchase your initial inventory, then use money from customers to grow the business by asking for upfront payments in the beginning.
Create Traction Before Approaching Investors
Remember, the higher valuation your startup has, the fewer shares you will have to give investors in exchange for capital. You can create a higher valuation by building traction for your startup before approaching investors. For example, you can work on building your team, create a prototype of your product, get consumer feedback and reviews, and start selling your product or service. The more traction you can build, the better your negotiating position will be with investors because you will have already proven that you have a viable business.
Consider Debt That Requires no Equity Relinquishment
Angel investors and venture capitalists aren’t the only sources of startup capital for your business. In fact, you can take on debt from bank loans, friends and family, Small Business Administration loans, or alternative lenders and not give up any equity at all in your business. Just remember that equity isn’t the only factor you need to be aware of when considering a business loan. For example, will a family member want too much control in managing the business, or will an alternative lender charge exorbitant interest rates?
Negotiate With Investors
Rather than automatically accepting the standard terms presented to you by an investor, be prepared to negotiate a better deal for yourself. Equity shares are decided on a case-by-case basis. If you’ve done all you can to self-fund and build some traction, your negotiating position will be much stronger.
Maintaining as much equity in your startup as possible will offer you greater financial rewards in the end. Don’t unnecessarily give up a bigger piece of the pie than you have to.
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