My Most Received Question – What's A Good Percentage To Give An Investor?

5%? 50%? 90%?

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It’s quite chaotic for new founders and entrepreneurs, isn’t it?

• On one hand, you want your project to take off (or survive), and you need that investor’s $500k.

• On the other hand, you don’t want them to take all the glory for your project and regret it in the future.

  • You probably heard the story of Roy Raymonds, the founder of Victoria’s Secret, and how he sold it for $1m only for it to generate $1b per year a while later on.

You’d be happy if the investor said, “Alright, I’ll invest $1m for 2% of your company; that sounds fair.”

You’d be stressed if the investor said, “Alright, I’ll invest the $1m for 51% of your company.”

I’ve been consulting for 12 years and worked with over a hundred startups in their investment preparation. This question is a common one. Now, let me show you how it’s quite useless to have such emotions and stress out about it.

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What's A Good Percentage To Give An Investor?

The word “Good” here does not make sense. What’s a good price to sell tomatoes? The answer is, “It depends on where you are and how good they are.”

It’s exactly the same. You’ve got tomatoes, and you're selling them to that investor. How much will you sell them for?

You might have a good product that you think is worth a trillion dollars (I had a potential client who once pitched me this number). But the real question is, “What makes that client sound unbelievable, while you, with your $100m valuation, sound believable?”

Where does the logic come in? If you see a product like Reddit, with quite a large net loss valued at $8 billion, and Twitter, with revenue of over $5 billion in 2022 currently valued at $12.5 billion, then some things are not making any sense.

• Forget about the game of entrepreneurship and how your idea is worth billions.

• Forget about how Zuckerberg became a billionaire because of an idea.

A business is a piece of paper with a few numbers. You could have a restaurant business idea that you think is valued at $1 trillion and that an investor should invest $1m for 0.01%.

You could actually create financials that prove you right. But something won’t be on par with the market growth. You’d be imagining that your restaurant will grow in a way that is unprecedented, that people will eat 20 times the amount they eat today. Some variables in your equation will be wrong (or at least far-fetched.)

You need to make the numbers logical. When you do that, then you’re on track to make sense to the investor.

What’s a good percentage to give an investor? It depends on your valuation. Let’s say you’ve made $10,000 this month of revenue. You’re projecting to make $20,000 next month. Ask yourself this - Is this reasonable? Has it been done before? Yes? Alright, proceed.

What will your projections be in 5 years? How much money will you need to keep running to keep having a positive cash flow? If you go broke in a week after that investment, then it’s a useless investment.

You could say that you will need this investment for four quarters, then raise another round to keep growing. That’s okay as long as you have a plan.

Now, based on your calculations of this 5-year valuation, which should include:

1. Revenue projections in 5 years.

2. Industry growth

   1. If you manufacture paper, it won’t grow as much as green energy, for example.

3. Market benchmark

   1. If you’re creating EVs, you’re not going to grow as fast as Tesla did; they had the “first movers advantage,” but you might study other similar companies to have a logical growth benchmark.

Now, put these three elements in a parallel line graph, and then you’ll know that your valuation makes sense. This is when you can ask for a certain percentage based on that.

If you’ll be valued at $1m in 5 years, then it doesn’t make sense to get $1 m from an investor for 10% of your company right now. After all, in 5 years, their 10% would be worth $100,000 (not a very good investment).

But certain situations change those entire variables. This is the human part of me speaking rather than the consultant. Let’s say you’re in a bankruptcy situation unless you get an investment that will get you growing.

You’ll need this investment for survival. At this stage, become a salesman and get the best offer. If not, your valuation would be $0, which is a lose-lose.

But in most cases, entrepreneurs who raise investments already have something to show and are looking to accelerate their growth; that’s why a valuation goes a long way.

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A few resources you could download to help out with this question.