software, equity, founder, investment, venture-capitalI’m finishing development of my project’s proof of concept (it’s a software prototype) this year. After that I’m going to incorporate with some small authorized capital (aprox. 5.000 EUR). The market cost of prototype’s development is about 100.000EUR. The next step is to find an investor with money for finishing the product and starting sales.
What is a typical scheme of selling equity? For example I need 500.000EUR to finish the product development and to start earn money. Does it mean that if an investor give me this money I have to sell him 84% equity (500.000 of total 600.000)? Or is it possible to sell 50% for 250.000, then the investor and I both increase the authorized capital by 250.000 to get 500.000 in total. What is a common scheme? (I divided 50x50 for simplicity, it’s not the point of the question)
To keep track of your equity distribution and valuation, it is a good idea to make a capitalization table (cap table). You can find some freely available templates here. If you would like to keep it online, you can use a service like eShares or Sharewave.
Your investor will often want to see the current cap table to look at the list of equity holders and rights they have. Since you are starting with some authorized capital in the beginning (Pre-money) your company will have that much valuation. Once you are ready for an investment, the valuation your investors come to, will be the Post-money valuation. How much equity they take will depend on that.
E.g. Assume that currently your pre money valuation is 5.000 EUR and you own all the 1000 shares of the company. Later if someone comes and invests another 5.000 but values the company at 50.000 EUR then they will pick up 10% of the equity or (100 shares in this example). Your own stake will get diluted from 1000 to 900 shares but each share will be worth way more now. (from 1 EUR to 10 EUR).
In the US (this may be different in the EU, but I don’t think so) no. You set the terms meaning if you wanted to you can get the 500,000 Euro and only give him 10% of the company. The question then comes down to the evaluation, based on the market, revenue, product e.g. is the 500,000 euro worth more then say 10%. So you set the terms on what you think is right.
Side note, I would not give 50% of the business away just to an investor who is giving you money. That really won’t help you in the long run if the person won’t be contributing to the development.
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