For startup founders, offering equity to investors can feel like walking a tightrope. On one hand, securing funding is crucial for growth, and equity may be the key to unlocking that capital. On the other hand, too much equity given away at an early stage can lead to significant dilution, potentially reducing your long-term stake and influence in the business.

Deciding how much equity to give investors requires careful consideration of several factors, including your startup’s stage, the amount of funding needed, and the type of investors involved. This blog will explore how founders can make this critical decision while maintaining control and maximising the value of their business.

Understanding Equity and Dilution

Equity represents ownership in your startup, typically offered as shares. When you bring investors on board, you give them a percentage of your company in exchange for capital. This process, while often necessary, dilutes the ownership percentages of existing shareholders, including yourself as the founder.

For example, if you own 100% of your company and bring in an investor who takes a 20% equity stake, your ownership would be diluted to 80%. Equity dilution increases with every additional funding round, which is why it’s crucial to carefully calculate how much equity to offer at each stage.

The goal is to strike a balance between raising enough capital to grow your business and retaining enough ownership to maintain control and benefit from future profits.

Key Factors That Determine Equity Allocation

Determining how much equity to give away involves evaluating a variety of factors that vary depending on your startup’s unique situation. Below are the main considerations that play a role in calculating equity splits.

1. The Stage of Your Startup

The stage of your startup significantly impacts the amount of equity you should offer investors. Early-stage startups typically give up more equity because they are higher risk and have less market validation.

• Pre-Seed or Seed Stage

At the very beginning, when your product might only be an idea or prototype, investors take on the most risk. At this stage, it’s common to offer 10%-20% equity to seed investors in return for funding. For first-time founders, this percentage can be higher, especially if they lack a track record of successful ventures.

• Series A and Beyond

By the time you reach Series A, your startup is expected to have demonstrated some traction, such as revenue growth, user acquisition, or market acceptance. At this stage, founders often give up 15%-25% equity to institutional investors.

The later the stage, the more negotiating power you have, and the less equity you may need to give away. Ideally, founders aim to retain ownership above 50% through Series A to maintain control over major decisions.

2. The Amount of Funding Needed

The funding amount directly impacts the percentage of equity you’ll need to give away. Investors evaluate how much capital your startup requires and the valuation of your business to calculate their equity stake. This is done through a simple formula:

Investor Equity (%) = Investment Amount ÷ Pre-Money Valuation

For example:

• If your company’s pre-money valuation is $2 million, and an investor is putting in $500,000, they’ll likely receive 20% equity ($500,000 ÷ $2,500,000 post-money valuation).

Here, the higher your startup valuation, the lower the percentage of equity you’ll need to offer. Therefore, creating a compelling valuation rooted in market potential and metrics is critical in negotiation.

3. The Type of Investors

Different investors have different expectations for equity stakes. Knowing the preferences of your investor pool can shape how much equity to offer.

• Angel Investors

Angel investors typically invest smaller amounts ($25,000-$250,000), often in the pre-seed or seed stage. Since they’re investing at a high-risk phase, they may require significant equity, usually 10%-20%. However, angels may also offer mentorship and strategic connections, making the equity trade worthwhile.

• Venture Capitalists (VCs)

VCs deal in larger sums and often lead Series A and later funding rounds. A typical VC firm looks for 15%-30% equity in exchange for their investment. Because VCs look for high returns, keep in mind that their terms may also include a strong focus on scaling quickly.

• Friends, Family, or Crowdfunding

When raising money from friends, family, or crowdfunding platforms, the amount of equity given away is usually less rigid. Founders often have more bargaining power in these arrangements, with equity percentages ranging from small symbolic stakes (5%-10%) to larger chunks depending on the circumstances.

Implications of Equity Dilution

While giving up equity may secure the funds you need, it’s essential to understand how equity dilution affects your ownership and control over the company.

• Loss of Decision-Making Authority

If your ownership stake falls below 50%, you may lose control over major decisions, as large investors can outvote you on key issues. By the end of Series A or B rounds, the founders’ ownership frequently reduces to 30%-40%. You’ll need to plan to protect your control.

• Impact on Future Funding Rounds

Your equity decisions now impact how much you can raise in future rounds. If you give away too much equity early, you risk diluting your long-term ownership significantly by the time of Series B or C rounds.

To mitigate dilution, some founders establish "founder-friendly terms" or vesting agreements where their shares remain valuable even after multiple funding rounds. These strategies keep founders incentivised and ensure their continued influence in the company.

Strategies to Negotiate Equity

Negotiating equity can be challenging, especially if you’re a first-time founder. Here are some strategies to secure the best outcome:

1. Build a Realistic Valuation

Investors base their equity stake on your valuation, so having an over-inflated or under-assessed valuation could hurt you. Use financial modelling and industry comparisons to set a valuation that aligns with your growth stage.

2. Leverage Non-Financial Benefits

If your investors bring strategic value—such as connections or market expertise—they may be willing to accept a smaller equity stake in exchange for a larger consultancy role or board position. Be clear about the non-financial benefits they offer.

3. Tranche Investments

Some startups choose to accept funding in tranches instead of lump sums. For example, instead of giving away 20% for $500,000, you could negotiate smaller investment instalments tied to hitting specific milestones.

4. Retain Founder-Friendly Terms

Negotiate for provisions that protect your stake or control over key company decisions. For example, issuing preferred shares with limited voting rights to investors can prevent them from outvoting you on the board.

5. Study Comparable Equity Splits

Research startups similar to yours in industry, stage, and funding structure to see how they negotiated equity splits. Case studies can provide realistic benchmarks to guide your decisions.

Typical Equity Splits at Different Stages

Here’s a breakdown of typical equity splits at various funding stages to provide a benchmark:

• Pre-Seed: Founders often retain 80%-90% of equity, giving away 10%-20% to angel investors.

• Seed: Founders retain around 70%-80% equity, giving 15%-20% to seed funds or accelerators.

• Series A: Founders typically hold 50%-70%, while VCs or institutional investors receive 15%-25%.

• Series B/C and Beyond: By this stage, ownership might be distributed as 40%-50% founders, 30%-40% investors, and 10%-20% for employees (via stock options).

Final Thoughts

Determining how much equity to give to investors is one of the most critical decisions a startup founder will face. While funding is essential for growth, protecting your stake and long-term vision for the company is equally important.

By considering factors like your startup’s stage, funding needs, and investor types, and by leveraging smart negotiation tactics, you can achieve a balance that benefits both your business and your investors. Ultimately, equity isn’t just about money—it’s about aligning interests to create sustainable success for all stakeholders.