For any investor, money matters. When they lend you money to run your business, one thing they need is good returns. But, giving an investor good money does not mean you give them a good chunk of your profits, and you are left with peanuts. You have to calculate how much percentage of your profit goes back to the investor in the form of returns.
There must be a genuine pledge to a solid leave strategy in three to five years. On the off chance that you don't care for these standards, revamp your business plan to require less Investment.
What percentage should you give an investor?
Investors need to have enough clout to ensure you don't choose later to prefer not to sell the organization. That doesn't imply that each investor will need more than 50 percent, yet the person will quite often need to see that the outside investors, when their property is consolidated, hold more than 50 percent. They don't bring in cash when you do. They possibly bring in cash when you sell.
So, make the best of your bargain only after you are have completed a thorough research on the investor and the financials of your own organization. YOu also need to have five year plan ready to project the future prospects on which the investor will bank on for a good amount of investment in your venture.
How to calculate the returns?
When the investor asks for a stake in your company while negotiating, you need to take care of the following things:
Take a note of your cash flow
First, you need to have an idea as to how much cash flow your company’s pockets have. Second, the amount the financer is offering you. On the basis of these two, you can decide on whether you give your investors money or give them a stake. Remember, giving them a higher percentage of stake in your organization, might turn out to be a hurdle for you.
However, make sure not to give equity to a person with whom you do not want to have a long-term business relationship. Those small percentages that startups offer their investors will make you go crazy. Those shares are important as when you grow big, these shares will be needed for employees.
Be tough on calculations
You need to do the maths of equity and valuation correctly. Your negotiation with the investors all depends on how much you think your organization is worth. So, if you agree to a 10 percent equity for $250,000, you are saying that your organization is worth $2.5 million. Also, with more equity percent an investor has in your company, the more they will bug you for money if things do not go the right way for you.
What rate of return do investors expect?
Since most investors get their cash once again from the offer of an organization to another business, investors contemplate how huge an organization's valuation can develop after some time. The greater the stake in a company, the better.
All in all, holy messenger investors hope to get their cash back within 5 to 7 years with an annualized inner rate of return ("IRR") of 20% to 40% of stake in a company. Investment reserves take a stab at the higher finish of this range or more.
Therefore, you have to first evaluate your own startup and then approach any investor for finances. A clear roadmap pf investment with a clear headed investor can only make your business work. Do not give away too manu shares for it is your baby you have raised all these months. An outsider intruding this space will affect your working and vision.
We, at OpenGrowth, are continually looking for trending startups in the ecosystem. If you want to know any further information about the startup ecosystem or have any mind-boggling ideas, do refer to the other blogs at OpenGrowth. If you have any suggestions, do let us know in the comment section below.
Contributor: Sudeshna Dutta
Sudeshna is an engineer in making. She is a writer at OpenGrowth. Apart from dealing with circuits and chips, she is passionate about being a keyboardist and pianist and wants to attain professionalism in it with her talent coupled with hard work.
