Editor's note: This article written by Alan Hall originally appeared on Forbes.com and is being reprinted with his permission.
You want how much ownership in my business?
It's an emotion-filled question I hear every time I meet an entrepreneur seeking money for his or her business.
An invitation to a prospective investor may be the hardest decision in an entrepreneur's life.
Without a doubt, this very critical topic has significant ramifications for both the investor and founder. Due to the nature of this crucial issue, I am pleased to share with you a high-level overview of how each entity thinks about ownership and how this hot topic can be resolved harmoniously for all.
From an entrepreneur's perspective, he has conceived a brilliant idea, designed a remarkable product or service, knows customers who will buy immediately and is ready to launch the company with vigor.
He's passionate about the purpose and highly committed to a noble cause. It's his baby and he loves it. It's all he talks about with anyone who will listen. He knows his idea is worth millions of dollars. He sees thousands of employees, great wealth for one and all, and a room full of awards honoring his genius. He intends to run his company forever. In time, his children will follow him.
There is, however, one huge problem.
He's run out of his own money, his relatives' money and the money of any fools who've invested with him. He knows that without further funding he will be forced to close the doors.
Where does he turn for money to grow the business? He can reach out to a bank. It has money to lend. But unfortunately, he has neither the financial history nor the collateral required by the bank to obtain a personal or commercial loan.
"How about angel investors?" he ponders. "I know they will love my idea and fund my plan. They've got lots of money to invest."
In his mind, he sees these investors as generous, charitable and like family.
"They are better than a bank," he muses. "I won't have to pay interest to them and surely they won't want much ownership. I'm sure they'll understand why I want to keep most of the ownership — it's my idea, it's my company and I've made great sacrifices. It's my baby."
He moves forward to meet with angel investors to pitch his terrific plan. He learns they like his company and that they are willing to give him enough funding to reach profitability. He's thrilled. But this moment of joy ends abruptly when he hears the terms of engagement.
Kindly and professionally, the lead angel describes how sophisticated investors partner with entrepreneurs who need their money. She begins with an overview of how angels view a company's value. Next she outlines the various stages of company growth and the milestones of each. She continues to delineate the levels of financial risk at each stage.
She continues her presentation with the desired percentage of ownership the angels want for their investment in the company and a request to include employees in a stock-option plan of up to 15 percent of ownership in the company prior to the angels' investment, along with a list of legal requirements and terms. She notes that their goal is to obtain 10 times their investment when the company is sold.
Instead of being thrilled, he's now stunned. You want how much ownership in my company? What happened? Where's the love, the charity?
He returns to his office and shows his wife the angel presentation. He's anxious to consult with her and better understand the offer.
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