If you ask an investor to put money into your business in exchange for shares, the return on investment should push them to say yes to the deal. However, what makes a fair percentage for an investor varies according to the type of investment.
In this article, we will look at what different investors are actually looking for and what appealing offers you can make for them in return.
To understand better how investors tend to contribute to your business, let’s take a look at the type of investments out there:
This type of investment takes place when a company receives money from an investor in exchange for ownership of the company. The equity investment could also take the form of an initial public offering (IPO).
Debt investment is the acquisition of a significant amount of debt with the expectation of repayment with interest in order to invest in a company or project. Debt investment is less risky than equity investment because the investor will receive a fair percentage.
Source of Funding For the Start-up Founders
A startup entrepreneur should be aware that their company may obtain funding from a variety of sources. We have highlighted some of them for you below:
An angel investor is a high-net-worth individual, usually a close friend or family member, who gives financial support to small businesses or entrepreneurs in exchange for owning stock in the firm.
A venture capitalist is a person or organization offering funding for a business's launch. Large companies that can manage greater risk and seek a more significant return on investment than standard investments are often venture capitalists. It is mostly done in exchange for stock. Click here to know about the difference between an angel investor and venture capitalist.
To collect money for a business or project, a crowdfunding campaign solicits modest donations from a large number of individuals.Crowdfunding works well on sites like Kickstarter, IndieGoGo, etc.
This describes the process of starting and expanding a business utilizing solely available resources, such as personal money, home computers, and garage space.
The Seed Investment
A company attempts to obtain initial funding during this stage of venture capital financing to pay for the development of its product and business strategy. Typically, seed money is provided by friends, relatives,and angel investors.
What Is A Fair Percentage For An Investor?
Several variables, including the kind of investment, the degree of risk, and the anticipated return, will affect an investor's fair percentage.
The typical standard for angel investors is to provide between 20–25% of your company's profits. This is the return that investors will anticipate if you sell the company when it is still young.
Investors must be powerful enough to prevent you from subsequently deciding not to sell the business. However, the individual will frequently need to ensure that the outside investors, when their property is consolidated, possess more than 50%. This does not indicate that each investor would require more than 50%. In comparison to you, they don't bring in cash. When you sell them, you can make money.
Although this is the standard everyone offers, most firms offer 15% equity in a capital round. You may always suggest a succession of lesser raises if the investor haggles for a higher proportion.
What to Offer Investors in Return?
The majority of investors demand a stake in your business in exchange for their funding. Venture capitalists may accept considerably greater risk; for instance, if the product is still in development, an investor may require 40% of the company to make up for the significant risk they are taking. On the other hand, angel investors often want a 20–25% return on their investment in your business. But keep in mind that the funds are not a loan. You are requesting the investor to make a risky bet with their money.
The best technique to determine business returns is to account for investor capital while taking into account your cash flow. You may simply determine whether to provide your investors with money returns or stock at this time.
Moreover, your priority should be negotiating a fair percentage that won't hurt the company based on the cash flow. A pitch deck, calculations and business analysis are critical components of this procedure. For the pitch deck we recommend to work with a leading pitch deck agency. So, make sure you include everything that needs to be calculated.
If you are just starting a new business, add up all of your monthly expenses and multiply that amount by a period between 12 and 18 months.The amount represents the start-up capital required for your firm and its activities for the specified period.
How Much Share to Give an Investor?
An investor will generally need stock in your firm in order to stay with you until you sell it. You might not enjoy parting with a portion of your business. Many advisors say that the central guiding concept for those just starting out is that you should consider handing up somewhere between 10 and 20% of ownership.
When making your first investment agreement, make sure to avoid making big mistakes. Depending on how much money the investor offers, you can offer 15% of the firm or more if they are more interested in profiting from equity growth.
Moreover, don't provide shares to somebody you don't want working long-term in your company. Don't give 3–10% shares to your acquaintances because when the time comes, and your business grows and prospers, you will need those shares for your staff. If you don't develop, such people will persistently bother you and demand money from you.
How Do Investors Get Paid Back?
The repayment scenario relates to various situations and the different investment types. To make things easier for you, we have listed a few of the most common methods you can repay an investor:
This is ideal for commercial loans or a short-term investment contract with an assumption of payback. Simply make payments to the investor for the loan and interest due on a regular monthly basis or all at once.
Repayments at a Preferred Rate
The investor receives a priority payback in accordance with your pre-arranged terms.
Depending on the amount of stock your investor owns and the company's worth, you may decide to buy the investors’ shares back. Shares of the firm owned by the investor may be repurchased at a predetermined price.
You pay back a loan by swapping the debt for equity shares,repaying the investor with a proportion of the business equivalent to their investment. Consider paying dividends to your stockholders. The dividends would be cash payments made to shareholders and will be paid out of the company’s net income.
Do Investors Get Paid Monthly?
Investors have the option to decline monthly income funds and put their money into ones that will pay them on a regular basis. A current account would get a consistent monthly income if investors had their dividends sent into a different bank account.
Investors are frequently reimbursed according to their ownership of the firm or the portion of the business they possess as a result of their investment. This can be paid back either through what are known as preferred payments solely depending on the amount they now possess.