Most SMB (Small to Medium Businesses) owners tend to hold onto too much equity because they worry that if they give equity away, they will lose control of their company. Some owners want to own 100% of their company because they want more cash when they sell their business, others are just not comfortable with the idea of it. This is a myth. Sharing equity is a valuable method that when used correctly can increase the value of your business marginally. Below are a few points as to why you WOULD want to share your equity with investors or third parties.
How much equity should I share?
When raising capital, investors usually require a share of equity in your business to lower the risk of them losing their funds. If things go down south and they have a minority interest in your business they will have some form of control as well the ability to sell their share of the business if needed. You have a much better chance of financing your business or acquisitions by offering a piece of your company. Usually investors will take between 10 - 50%+ of your business depending on how desperate you are for the cash or how the deal is structured. If you are a start-up business, expect to give away anywhere from 30%-50% of the business to get things going. The more prepared you are, the less likely you are to give away "too" much equity.
You can also increase the value and credibility of your business by giving away free equity to a high caliber entrepreneur in return for their advice and/or services. Some high-level entrepreneurs may charge high costs to consult businesses, so why not try to offer them a piece of equity in return for their services. For example, let's say you are looking to get into business, you ask the bank to fund your business idea...
The bank initially refuses to help because your idea is too "risky" and they don't believe you have the necessary experience to run the company by yourself (most small business entrepreneurs will encounter this problem)...
Equity in exchange for services
So you approach an experienced entrepreneur in the same industry with a deal by researching online. You offer to give away a small piece of equity (say 10%) in return for the entrepreneur to jump on board with you and help you run the business a couple of days a month. They would have a set number of tasks that they would need to accomplish. You then take the same idea to the bank and tell them you have an experienced board member that is going to assist you to run the business and show them the business and consultancy plan - bank evaluates the risk factor and your chances of getting the cash increase substantially because the project has now become less risky.
You can also distribute equity in your company or idea between investors, suppliers, board of advisors etc. The point of doing this is to share the risk of the business, but most important of all, to lower the risk of your business or idea. You have a much better chance of finding finance, selling your business or even successfully running your business with a team of experienced personnel that are helping you complete your objectives. A word of caution when sharing business equity with suppliers, board of advisors etc, nothing is forever - always have a buy back clause in your written agreement that states after a certain period of time or revenue point, you will buy back the shares and recover the shares that were tied up initially.
Finally,
Before attempting any share dilution of your business, contact a business consultant or corporate advisor to get a third opinion. Every business is different and requires a different approach when sharing equity. Simply ensure that you're not giving away too much of the business too quickly and that every agreement is in writing. You don't want to end up having a dispute with your mentor/business advisor because of control issues or "vague" written agreements.
Eddy Valentin has been involved in business planning, start-ups and getting projects investor ready over the last 7 years. His latest venture [http://www.ValentinReport.com] was built to help small business entrepreneurs avoid the pitfalls of the business world, as well as provide sound advice to help them make better business decisions.