Question about equity ratio when seeking investor

**bzboy** · 12-06-2007 04:58 PM

I have invested my own money into my business so far and am looking to expand and create a sister company to create a larger product line for my company. I was considering looking into getting an investor to expand. The question I have is, when seeking investors, what kind of ratio are you looking at? what kind of offer is appropriate? I have never needed to have an investor, but if I want to expand to make my company even bigger I wasnt sure what percent investors normally expect to have. By the way, I am planning on meeting with a few private investors, not a bank loan.

**BusinessAdviser** · 12-06-2007 05:56 PM

Most investors who are investing significant funds will demand at least a 51% interest so that they ultimately have control of their money. However, if you are taking a smaller investment so that you can put it up as equity for a loan, you will be on the hook personally for the loan, will be therefore taking a larger risk, and will thus be able to maintain a larger ownership in the company. At the end it comes down to negotiating with the investor, his/her money versus your concept, abilities, and own financial contributions.

**bzboy** · 12-06-2007 05:59 PM

Gotcha thats what I was figuring. Ive heard there was usually a ratio of at least 51/49 for ownership. Thanks for the time in respoding, I now have a better idea

**Cole Taylor** · 12-06-2007 06:54 PM

Originally Posted by jmenq2

Most investors who are investing significant funds will demand at least a 51% interest so that they ultimately have control of their money.

Simply not true, been through numerous A rounds while maintaining controlling interest.

**BusinessAdviser** · 12-06-2007 08:21 PM

Originally Posted by Cole Taylor

Simply not true, been through numerous A rounds while maintaining controlling interest.

Let me clarify that for you. If you go to an investor for funding, my experience and knowledge indicates that you cannot reasonably hope to keep a controlling interest unless you bring something to the table other than simply an idea. If, for example, you bring an already established or partially created business, an excellent management team, and/or your own financial contributions, as well as a great idea, you will be able to leverage such resources that you bring for a greater stake. However, if you merely have an idea that you pitch to investors without bringing something else to the table, you won't keep a controlling interest. I'm sure there are exceptions out there, but in general, this is the rule.

In your case, you are bringing more than just an idea. It seems as though you are bringing an established company with a proven track record, which also establishes your credibility. As a result, you will be able to leverage these when negotiating the ownership interest to divulge in return for funds.

**Cole Taylor** · 12-06-2007 10:55 PM

I took that fact that the OP stated he had his own money into the venture and was Looking to expand that it was an ongoing concern. I dont see many start-ups looking for expansion capital

**bzboy** · 12-07-2007 05:07 PM

Thanks for the input guys I appreciate it. Im going to go in there an negotiate the terms and see what I can come up with.

**rodrix** · 12-09-2007 01:26 PM

Do the venture capital value of your company.
You shouldn't negotiate with the investor in respect to the amount of money you should have already put, but regarding the future money you are going to earn. If not you're not considering the potential value your company has, your effort, and your achievements.

How to make this seriously with numbers.
Project your future earnings with justified basis for worst, best, and normal case scenarios.
Give a probability to each.
Calculate the average future earnings.
Calculate the Net Present Value of your future earning at a very high rate of Weighted Average cost of capital (ex: 70%), you'll have to justify it depending the risk of your project.

Once you get the Net Present Value, that is what your company is worth TODAY.
Divide the amount of money you are asking from the investor by your Net Present Value.
That is the % of "fair" share the investor should get considering the real value of company considering it's potential. If I recall well this is called the Venture Capital Valuation of firms way.

Hope this helps,

**rodrix** · 12-09-2007 01:36 PM

Let me add something:
So if you have already put $10000 and you ask the investor to put $90000, without considering future earning and potential, the investor would get 90% of the company and you 10%. (90.000/100.000 =90%)

But if you NPV (Net present value) results in $1.000.000 then the investor should only get 9% as the real value of your company would not be $100.000 but rather $1.000.000.
This is fair, as you cannot omit your future earnings. Company will be valued in $1.000.000 or more as soon as you can prove you can get that earnings so it makes sense that you shouldn't get just 10%, as at that time the company would be worth much more thanks to you and what you have already done, and not thanks to others.

Hope this helps to give a more math and facts proof to discuss with an investor. Providing this numbers and estimations make it more seriously and is harder for the investor to negotiate an unfair deal.

Cheers!

**rogercbryan** · 12-09-2007 02:07 PM

bzboy, what is the current:
annual sales of your primary company?
how much do you need to borrow for the sister company?
what do you need to borrow the money for?
projected 1,2, and 5 year sales for the new company?
what is the risk level for the investor?

There is no set formula for ownership. You need to factor in the above criteria with many other in order to get a fair ownership distribution. If you have a business plan I'd be happy to look at it and give you my opinion as to how your equity might be distributed.

**BusinessAdviser** · 12-09-2007 03:22 PM

Originally Posted by rodrix

Let me add something:
So if you have already put $10000 and you ask the investor to put $90000, without considering future earning and potential, the investor would get 90% of the company and you 10%. (90.000/100.000 =90%)

But if you NPV (Net present value) results in $1.000.000 then the investor should only get 9% as the real value of your company would not be $100.000 but rather $1.000.000.
This is fair, as you cannot omit your future earnings. Company will be valued in $1.000.000 or more as soon as you can prove you can get that earnings so it makes sense that you shouldn't get just 10%, as at that time the company would be worth much more thanks to you and what you have already done, and not thanks to others.

Hope this helps to give a more math and facts proof to discuss with an investor. Providing this numbers and estimations make it more seriously and is harder for the investor to negotiate an unfair deal.

Cheers!

You should throw in there how he can even FIND the free cash flow, which is necessary to get to all the other calculations. I'll let you give that a shot.

**bzboy** · 12-10-2007 02:31 PM

I appreciate all of the replies, Im still getting all of my ducks in a row and continuing to plan this out. I agree with the future earnings holding a huge weight in an investment opportunity. Im always 100% with all of my projects and never half ass things. I will follow up with you all once I am done finalizing the paperwork, before I speak with the investors. Thanks again

**rodrix** · 12-10-2007 11:11 PM

Originally Posted by jmenq2

You should throw in there how he can even FIND the free cash flow, which is necessary to get to all the other calculations. I'll let you give that a shot.

Cash flow estimations depends on your suppositions and are hard to estimate.

You need to take into account current market size, the prices of similar products by analyzing your competition compared to yours, and how much a person spends average in that market. You would then use this figures to estimate your potential market share, and finally your revenues, taking into account marketing projected actions.

That is hard way to go. You'll probably find yourself without enough information or making too many suppositions.

Easier: Launch a blog and site of your business and tell the world about it as you build the product. Get comments, build suggestions, build a better product, and make changes on design pipe-line. Validate your business idea, if people don't like it, change it. Your traffic should grow with potential customers interested in your site.
With historical visits per month information (at least 2 or 3) do a simple linear regression, or assume an expected growth rate from your experience from other blogs. Estimate the number of projected visitors considering marketing campaings and actions, by changing growth trend at specific points. Use pessimistic, normal, and optimistic approach, considering different growth values.

Assume a conversion rate for all this scenarios. For example you could assume
that 0.1% of the visitors of your site will buy your product. Compare this values with real values from market to understand your potential, and to put numbers that make sense

Finally you get again, the projected revenues from each month, as a function of visitors in your site.

There are many other days of projecting revenue values, that may vary for your business.

HOWEVER:

THIS IS THE BOTTOM LINE: This is just a tool for making your arguments more valid and are just raw estimations. So there is no way of really knowing your future cash flows for sure. BUT the numbers won't sell the business for you, YOU'll have sell it to the investor and make him BELIEVE that what you say is true and make him believe that YOUR estimations (whatever you did) are TRUE. If you can make that, then your negotiation will be easier and you'll have something more to negotiate.

Cheers
Rod