Equity distribution is essentially about leverage. There is the advantage of building a great business, but essentially, there are no proven ‘strategies’ for maximizing equity. The equity you end up with is usually a reflection of the market’s assessment of the worth of your company and your individual worth to the company.
Naturally, investors will be happy to give you a higher valuation/percentage holding, if you “protect their deficiencies” with all sorts of suspicious conditions, such as , participating preferred shares, and so on. Which can, after a couple of rounds, result in you earning literally nothing on exit.
Having said that, a couple of tried and true strategies to maximize your equity holding are:
1. Finance yourself
If you want to keep 100%, or close to it, the short answer is, don’t get outside funding. Fund internally with bank loans, etc. If you can’t do it all in-house, get as best as you can, build up revenue and profit, before looking for funding. Basically, do as much as you can yourself, before looking for more money.
So try to run your business with minimal resources and be as smart as possible about not spending money foolishly. Carefully control your cash burn. And outsource your non-essential functions, as opposed to hiring, so as to save a significant amount on staffing costs.
2. Determine your goal
Determine what you want. Do you want more equity holding or control of your business? Maybe all you need is patience, not outside funding. With time, the business will be large enough and break even. Now, if you’re looking to be the founder of a million naira business and want the popularity and fame that comes along with that, who cares what percent you own?
The question remains, do you want maximum equity or maximum wealth? Dangote doesn’t own all of Dangote Group, but he is doing alright. A smaller piece of a bigger cake can often (though not always) be better. Be sure you focus on building the best cake there is.
3. Avoid negotiating unclear terms
One of the best strategies is not to maximize your equity, but to prevent yourself from negotiating particularly back-breaking deal terms. So many startup founders have had to exit but never received any money due to difficult deal terms.
Negotiate every term, an don’t just accept any “standard industry practice” explanation. However, it is advisable to graceful decline the investor (perhaps you will need them later when your business got some traction and they may be more cooperative).
As a startup, do you want to be rich, or want to be king? Let us know in the comments!