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How funding works with investors and your equity rate

| Apr 26, 2016 | Business Formation & Planning |

If you’re considering creating a start-up company, one of the things you’ll need to get is funding. Normally, a start-up company will cost around $15,000 to launch, and then get another $200,000 in investments a few months later. After that, the goal is to get another $2 million from other funding sources six months later. That’s how it should work, but that’s not always how it does.

It’s important to consider the kind of funding you need to start your business. You also need to consider how you’ll share equity with your investors. Here’s a few examples.

If you’re the founder and fund everything, you own 100 percent equity in your company. With a co-founder, you now each have 50 percent equity in your company.

When you begin to collect investments from family and friends, you’ll begin splitting with options. For instance, you and your co-founder may take 37.5 percent each leaving a 5 percent equity share for your investing family member and another 20 percent for future employees. As funding continues, the founders lower the amount of equity they own and split it among others.

Why does this work? Owning 100 percent of a company making only $1,000 a month is a far cry from owning 10 percent of a company that earns $1,000,000 a month. As the value of the company grows, the founders can take an equity cut without actually losing revenue and income. Basically, you’ll take a smaller amount of equity, but that equity will be worth more money as you gain more investors and grow your company.

Source: Funders and Founders, “How Funding Works – Splitting The Equity Pie With Investors,” accessed April 26, 2016

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