Equity advice for Design Entreprenuers
For fellow design entrepreneurs,
I have seen this thread some time back but could not reply. I think the time has come when designers running small companies need to let go of the 100% hold and expand the reach with someone else's money. It is easier said than done. We at Onio have had several rounds of discussions with 'VCs' and 'Angel Investers'. In this process I also met and got some guidance from my IIT classmates and collegues who have played the equity game several times till now. By the way, Onio also successfully managed some capital inflow last year through an angel investment.
There are thousands of books on how to write a buisness plan and how to judge a VC's offfer. But I am answering only some top-level inquiries in the minds of a design entrepreneur. But please remember that like in colour theory, there are thousand thumb rules....but when you are in the middle of it...and your gut feel says, it is a 'Go'...then dump all the rules and just go for it...
Here are my learnings-
1. How much is your business (services) worth?
In the DotCom times...people valued their business up to 10 times their total turnover (there are several parameters in terms of kind of accounts/brands being handled, age of the business etc...I am only touching upon some thumb rules...). You can also cut your pie at your 15-20 times your profit. If you are holding IPRs which would make tomorrow's iPods then it can be 100 times your profit as well :).
2.How much should you let go in terms of initial equity?
Expereinced people advice that lesser the better. Don't let the 'control' go to a stranger for few bucks. 10%-15% is good enough dilution. Take money from two people with smaller chunks of money rather than from single entity. But Investors would never settle for less than 25-30%. Figure of 26% has special legal angle as, it give 'vito' rights to the investor, against any decision taken by the board. So you should probably stop at 25%.
But underline is that all depends on the deal you are getting. If APPLE is buying you stake and offering you some money for 98% stake for you company, hmmm..may be that 2% is worth more than 100% of you company all your life :).
3. How to gauge the investor?
People say that this is like an arranged marriage. You have a gamble of you life...but you need to be informed. You need to be informed about the background of your investor, as much as he needs to be aware about your corporate health. You need to meet the people at the companies, he/they invested in earlier. You need to do some 'googling' etc. It is never about how big a company and how influential a person, is investing in your company, it is more about 'personal comfort' you have with your investor.
4. What about Debt funds?
Yes, if you can garner bank funds, loans etc. for your next leap, please go ahead. That is the esiest way to save equity dilution for next expansion. We at Onio also managed a Credit Line, from a PSU bank, which came handy for buying office etc. It rquired a good gentleman bank-manager and a lots of explaining on what we do...A credit line of few-lakhs is a first option every entreprenur should try for...you lose nothing, but you get a support-life-line for liquidity crunches.
For more info, write to me personally.
Manoj Kothari
Founder Director and Senior Design Strategist
I have seen this thread some time back but could not reply. I think the time has come when designers running small companies need to let go of the 100% hold and expand the reach with someone else's money. It is easier said than done. We at Onio have had several rounds of discussions with 'VCs' and 'Angel Investers'. In this process I also met and got some guidance from my IIT classmates and collegues who have played the equity game several times till now. By the way, Onio also successfully managed some capital inflow last year through an angel investment.
There are thousands of books on how to write a buisness plan and how to judge a VC's offfer. But I am answering only some top-level inquiries in the minds of a design entrepreneur. But please remember that like in colour theory, there are thousand thumb rules....but when you are in the middle of it...and your gut feel says, it is a 'Go'...then dump all the rules and just go for it...
Here are my learnings-
1. How much is your business (services) worth?
In the DotCom times...people valued their business up to 10 times their total turnover (there are several parameters in terms of kind of accounts/brands being handled, age of the business etc...I am only touching upon some thumb rules...). You can also cut your pie at your 15-20 times your profit. If you are holding IPRs which would make tomorrow's iPods then it can be 100 times your profit as well :).
2.How much should you let go in terms of initial equity?
Expereinced people advice that lesser the better. Don't let the 'control' go to a stranger for few bucks. 10%-15% is good enough dilution. Take money from two people with smaller chunks of money rather than from single entity. But Investors would never settle for less than 25-30%. Figure of 26% has special legal angle as, it give 'vito' rights to the investor, against any decision taken by the board. So you should probably stop at 25%.
But underline is that all depends on the deal you are getting. If APPLE is buying you stake and offering you some money for 98% stake for you company, hmmm..may be that 2% is worth more than 100% of you company all your life :).
3. How to gauge the investor?
People say that this is like an arranged marriage. You have a gamble of you life...but you need to be informed. You need to be informed about the background of your investor, as much as he needs to be aware about your corporate health. You need to meet the people at the companies, he/they invested in earlier. You need to do some 'googling' etc. It is never about how big a company and how influential a person, is investing in your company, it is more about 'personal comfort' you have with your investor.
4. What about Debt funds?
Yes, if you can garner bank funds, loans etc. for your next leap, please go ahead. That is the esiest way to save equity dilution for next expansion. We at Onio also managed a Credit Line, from a PSU bank, which came handy for buying office etc. It rquired a good gentleman bank-manager and a lots of explaining on what we do...A credit line of few-lakhs is a first option every entreprenur should try for...you lose nothing, but you get a support-life-line for liquidity crunches.
For more info, write to me personally.
Manoj Kothari
Founder Director and Senior Design Strategist
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