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These days I am in process of raising 20k$ for my project (a facebook application), that requires at least 30k$ (10k of which I am able to come up with myself). When negotiating with an angel investor he initially asked for 40% stake but I have succeeded lowering his offer to 25% (we haven't signed anything yet).

Does it sound like a good deal, or the percentage is too high? Should I try to get the funding for 20% ? or maybe even lower ? It may force me to go with another investor of course...

I saw that companies like yCombinator and techstars provide these amounts for as high as 10% stake, but I guess these deals are pretty hard to come by.

What do you think? Any advice would be highly appreciated.

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3 Answers

up vote 2 down vote

Not from experience, but I guess from common sense(?):

  • Is this the only offer you got? Did you approach many other angels?

It's generally a good idea to consider many options, and in this case the time/face cost is a good investment, until at least 15 angels. You can count on it as advertising and training too! It will help you refine your idea and verify assumptions with outsiders.

  • If you are investing 1/3 of the capital, are you also investing sweat equity? I.e. what else will you do in the project that's not covered in the $30k? What does the angel bring other than the money?

Essentially your idea, execution plan, and the follow-up/execution promise is valued at 41%.

  • Is (s)he a domain expert? Network? Will (s)he pitch it to his xk fb friends or is he not even going to be a user (a customer?)?

  • Do you then (when?) expect to be profitable or more funding will be required?

If profitable, you can compare the ROI with other investment opportunities.

  • How much are the $10k worth to you? Is it all/year/quarter your savings?

If you are convinced that the risk of losing the money is low enough, you may invest more from borrowing. If not (but still think worth the investment) take your best offer (even if this).

Oh, also remember that chances are that you gonna fail anyway (sorry!) - so equity is not that important. The experience (and failure status!) will most likely be your returns.

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Thanks for the thorough answer. The details are this: I am a freelance web developer and will do most of the development work myself. I estimate the project duration 5-8 months of 70% work in this project and the investment is meant to cover my time price (the fact that I don't work on other projects that earn me money). The investor is a close relative and it will be difficult to come by with some other angles. The investor will not contribute anything to the project except funding. – user9950 Apr 24 '11 at 17:38
@user9950 - I would invest time in presenting the idea to other 'experienced' angel investors. I think it'll benefit you a great deal to get feedback on the idea (from friends and competitors) but angels that put money it will be critical of business too. Then again, pick the best offer. – simpatico Apr 24 '11 at 20:08
@user9950 - For 8 months of work, $20K seems kinda low. Is this after hours work? Work out your estimated effort * hourly rate - this will tell you the rough cost of the project. Depending where you are situated geographically and economically, perhaps you'd be better to go it alone - mixing family and money can be a dangerous proposition. – dave Apr 24 '11 at 22:19
Hi Dave, this estimation is rough and I do take in account that I lose some money during the process but can take it. Anyway, the alternative to getting the funding from this angel is going to a yCombinator like funding plan which seems to be more difficult to get into. I also agreed with the angel on a modular funding plan, which means I might not take the entire 20k$ from him, but get it from other resources instead, and then give him 6.25% for each 5k$ I get from him. – user9950 Apr 25 '11 at 5:45
up vote 2 down vote

It all depends on how much total money you need. If you need like $1M to get your product done, then 25% seems kinda high. If you only need $80k to become profitable, then it might be a good deal.

In general, 25% for $20k is kinda high for a tech startup. Usually, people don't give away percentages but rather the angel round is a bridge to a bigger round (like the A round). That way, you don't have to set a value and you have more flexibility in raising more money.

Typically, the deal goes something like this: Bridge loan to the A-round with warrants (options for non-employee) kicker to make it worth their while (typically 20%).

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Thanks. The total money I need is probably not more than 40k% after all, So you say 20% sounds right? When comparing to the yCombinator alternative it is still not such a good deal. I'm not sure how hard it is to be accepted to such program. – user9950 Apr 24 '11 at 17:44
I don't think you can compare it to a Ycombinator deal since those usually take a lot more money to be profitable. I would also look at your time to profit predications and see if it will really be 40k of investment or a lot more. – Jarie Bolander Apr 25 '11 at 12:24
thanks for the tips. – user9950 Apr 25 '11 at 16:08
Jarie, what do you mean by when saying "YC take a lot more money to be profitable"? do you mean that the prevaluation of the company is high or that the total amount investment in the company is a lot more than 20k$? – user9950 Apr 26 '11 at 6:54
The typical YC deal is going to be geared toward additional rounds of funding later on. It's an incubator, so what they want is companies with the potential to hit it big. That means, they will need more money. – Jarie Bolander Apr 26 '11 at 12:26
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up vote 1 down vote

I think the real question is what will happen in the next round. Is $30K really enough for your project or just for the proof of concept? If it is just for POC (business and technology) who will finance it later on? The best answer would be 'clients'. In real life, too many cases end up with second and third investments.

So the real question is 'Is this specific angle a good partner for me?'

To be more detailed: Do you trust this angle? Will she/he help you when you need them? Do they believe in the business? How deep is their pocket?

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Thanks. I totaly trust the angel because he is a family relative of mine. I assume the total expenses won't exceed 40k, so I'm not sure if there will be a need for next rounds (maybe one). But then again I might be wrong. The Angel's pockets are pretty deep but they will naturaly want more of the profits for the second funding. So you think 25% for 20k is a good deal? – user9950 Apr 24 '11 at 17:47
25% for 20K is OK. If he is your relative, all remains in the family – Shai Ben-Yehuda Apr 25 '11 at 16:33
Good to hear, thanks – user9950 Apr 25 '11 at 18:26

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