One of the biggest risks in crowdfund investing is failing to understand the value of equity. Sharing the wealth is important, but you need to be judicious in how you do it. First and foremost, never give up control of your business. Simply put, never give up more than 50 percent of your equity when raising capital through crowdfund investing.
Most entrepreneurs go through multiple rounds of financing. You need to think strategically and ask yourself, “How many times do I think I need to go out and raise money? In each of those rounds, how much equity will I have to give up?”
As a general rule, the earlier you are in the development of a project, the greater the equity you need to give up. Someone with an idea who needs to build a proof of concept may give up 20 percent to 25 percent of a business for the necessary money.
Someone with an existing proof of concept may give up only 10 percent to 15 percent of the business for some growth capital. And someone who’s already generating revenue may be able to give up a smaller amount.
Of course, the equity percentages are dependent upon how much money you need as well. Raising smaller dollar amounts means you can give away less equity. Unfortunately, the larger the dollar amount you need, the greater the likelihood that you’ll have to relinquish a larger amount of equity.
Think of equity as an apple pie. You always want at least half the pie for yourself. If you’re going to give away pieces of it, the first slice may be half of the remaining half. The next piece may be a quarter of the remaining half, and the next may be an eighth.
Be fair and don’t be overly miserly, though. Using equity is a great way to get people to work with you. You may even be able to trade equity for services (such as legal, accounting, design, or computer services).