How much do you give up? How closely do you protect it? Who’s worthy? Are you going to be rich? How long until someone supports your yacht-buying habit?
The better question is: “How do you build a really big company?”
That question aside, protecting equity is something you need to be mindful of, but it shouldn’t inhibit the raise and growth. Founders raising equity for the first time typically spend too much effort on this and get sucked away from the business. The sooner the round is closed, the sooner you go back to being CEO and building a meaningful business.
The first step is understanding the mechanics of whatever kind of round you’re raising, and how it affects equity in the future. Extend that look beyond just conversion of debt at the A round. Build scenarios to see where the founders and employees stand after a few rounds that end in hypothetical acquisition. And be realistic. Some of the newer tools I’ve seen for this are Captable.io (Eric Ries) or Conjecta.
The next step is logically weighing the marginal cost and benefit of taking on investment (whether as stock or convertible debt). At the end of the day, if the terms aren’t ideal but all that’s out there, go with it. Without significant revenue to offset burn and to bootstrap the business, you’re in a better position to grow with capital to take advantage of opportunities.
Some basic questions to consider when giving up equity.
- How big do you see this business? (a small piece of something big = $$$)
- What amount of funding do you need/want? (can you realistically bootstrap?)
- Headcount needs as you scale (probably more than you think)
- Market Size? (small market = small exit)
- Can the investor materially move the needle? (strategics are worth a little more)
- Could the VC lead an A round? (minor warning on signal risk if they choose not to lead)
- Will you die or be a zombie before the end of the year without it because you’re waiting for the business to miraculously explode with paying users?
My personal opinion is you should take the investment if the deal is right. That part about being “right” can vary widely for the same company at any point in time so be smart about it. Weigh the options and don’t protect equity to the point that your startup fails. If money is on the table, take it and just close the round.