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How much equity to give investors in 1st and 2nd round?

We are looking to get funding in a couple months when we finalize our prototype and a couple other things.  Curious if someone has an idea of how much equity to set aside for 1st round funding and how much to keep for a 2nd round?  We are all equity partners, so 50% has gone to the founders building the process and prototype.

  • It can range anywhere from 3% – 51% depending on your situation. You need some quality professional guidance here or you’ll end having someone take the piss out of you. Find yourself a good law firm (Gunderson or Cooley would be a good place to start).

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  • 1) Don’t comp your law firm with equity. You can probably get your first meeting free as a means to make sure you have a good fit and hopefully use some of that meeting to answer questions like this one. You’re not really going to need them until you get a term sheet and are moving forward at which point you’re probably going to be able to pay their fee. In an early round, you’re probably looking at $10-$15K.

    2) I was a bit confused by your statement saying that the founding team has 50% of the company. Where’s the other 50%? In my experience, what’s fairly typical is to start with the founders splitting 80% – 90% of the business and allocating the remaining 10-20% to an employee options pool.

    3) Dilution – most institutional VCs in early rounds want to get to 20% ownership stakes, unless of course they just have to get it. Your dilution will depend on how many investors you have, whether they’re institutions or angels, how hot your business is, and in your second round, how many new versus existing investors you have. That said, I’d pretty much expect 25-30% in my first round and perhaps 15-25% in the second.

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  • Sorry if I was not clear to the 2. above.

    The founders have 50% right now, with a large % saved for VC’s/Angel round funding from investors. If we founders absorbed 80-90%, what would we have left for investors?

    Obviously they will want that. We also are hoping to save another 10% for the next few hires in the founding round of people we need to get on board to complete our total package/presentation for go get the funding. Does that help? This is what we are thinking….any thoughts

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    • Your investors dilute the entire round. If you start with 80/20 – founders/options pool, and your investors invest such that they want 20% ownership, you’ll simply issue more shares thus diluting all existing shareholders.

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  • Typical startup round dilutions are 20% – 33%, with 10% option pool (see option pool shuffle). But there are outliers. 1/5 – 1/3 is within 1std from what I’ve seen.

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  • The answers above aren’t unreasonable, but they leave out key points.

    Are you sexy? I don’t mean dirty sweaty sexy, I mean do you have 1 or more big name successful previous exits, are ex Google/Microsoft/Apple VPs, are some form of Woz-like tech star, etc? If so, the above answers are reasonable

    If you aren’t sexy – expect to get raped. If you’re lucky, you will retain control – but I frankly wouldn’t bet on it.

    However, as you are getting raped – fight the good fight. You do this by having as many real, money on the table potential investors as you can beg, borrow or steal.

    You must do this because if you don’t, too much equity being given away means you will NOT be able to raise more money in the future.

    You also have to look at who these potential investors are. Are they smart or dumb money?

    Dumb money is easier, but if you don’t hit the home run/triple/double quickly, they will ride your ass like an STD.

    Smart money, on the other hand, will be at least open to putting more money in if they still believe the premise works.

    All this is from my personal experience, but YMMV

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