Starting a business is not a cakewalk. You might have a brilliant idea, the right employees, and a proper location to set up your business. But how do you plan to fund your startup? Most startups and small businesses that plan on expanding need to raise funds from reputable investors to get their business off the ground.
These businesses provide a certain percentage of the equity in return. Equity is a crucial part of your organization, as it helps you get funding and ensures that your investors, employees, and other associates stay with your company and work together to achieve your long-term objectives.
The question is, how do you figure out the percentage of equity to give up? Just giving away a random percentage of the equity to your investors won’t work. You need to use an equity split calculator to get a clear idea of how much equity is worth sharing with your cofounders and what percentage should be given to the investors based on their investment amount. In this post, we’ll discuss the reasons you should use equity calculators and how they can improve your business’ performance and value in the long run.
What is a Startup Equity Calculator?
A startup equity calculator is exactly what the name suggests. It’s a tool designed to help startups, investors, and cofounders calculate a company’s equity based on factors like how much you are currently raising, the expected growth rate of your company, current profit margins, and so on. Knowing your company’s value will help you negotiate better deals with the investors.
Using the tool is pretty simple. You just need to enter the required information, such as your projected growth, capital, etc., and it will show your company’s equity. Note that the tool shouldn’t be used as the only or most reliable means to calculate your business’ equity. While it does give precise numbers based on the data you input, it might not always be accurate.
A startup equity calculator works on three vital inputs, i.e., the pre-money valuation, post-money valuation, and percentage of your equity given. Pre-money valuation refers to the company’s worth before funding. It’s calculated by comparing the company’s performance, net worth, and other stats with those of its competitors. Post-money valuation is the company’s worth after the investors have put their money in. The percentage of the equity is the part of the company sold to the investors and how much equity is left after that.
Why Use a Startup Equity Calculator?
The biggest perk of using a startup equity calculator is that it gives you an estimated value of your company’s equity, which helps in negotiating with investors. You just need to input the requested information into the calculator, and it will give you a clear picture of your company’s equity.
Besides that, knowing your company’s equity worth is important if you plan on selling your company or taking your organization public. It also helps you set realistic expectations for your company, as it’s easier to determine the sale value and whether you are selling it for the right price or not.
You can find a wide array of startup equity calculator tools online, each offering different ways to determine your business’ worth based on the data, like your existing capital, the money you have raised so far, the amount you are expecting from investors, and more. There are free and paid equity calculators available. Whichever you prefer, make sure it gives reliable information and is a trusted tool. Here are some key benefits of a startup equity calculator.
- Accurate Data: Using a startup equity calculator, you can gain the trust of your investors and employees. They will have peace of mind knowing that the equity division is transparent and fair. It’s calculated based on factors like the contribution of your company’s members or the investors.
- Negotiate With Investors: When pitching your business idea to your investors, it’s important to show your equity value. Giving a rough figure based on your assumptions won’t suffice here. Your investors want to know how you’ve calculated the equity and how accurate it is. They also want to know their ownership and how your equity will help generate their desired returns.
- Talent Retention: Your business’ equity plays a crucial role in retaining your existing employees and motivating them to stay with your business. It reassures them that your business is on the right track and that continuing the work for your organization can result in significant profit and growth for them. This is not only true for employee retention, but the equity calculator also helps acquire new employees.
- Easy to Use: The equity calculator is an easy-to-use tool that any cofounder or business associate can use to determine their company’s worth. Depending on the tool you use, you will be asked to provide information about your company, such as its current growth plans, valuation, available equity, and returns on investment. The tool produces an accurate equity value based on the input provided.
- Find the Best Co-Founder: If you are looking for a technical cofounder or an investor who can fund your startup, you will want to calculate the equity first. Equity should be split between the cofounders based on their contribution to the business. Note that the invested capital is not the only factor that determines the equity distributed to each cofounder. It’s rather their efforts, time, money, skills, and other contributions that are taken into consideration when splitting equity. Having an equity calculator will help you know how much each cofounder should get.
Conclusion
If you have recently set up a startup, you must have heard of the cofounder equity calculator. This tool is your best bet to determine how the cofounders should split the equity. Not only that, but it helps you pitch your idea to your investors with confidence. Selling a pitch is easier when you know your company’s valuation and the equity. It’s also easier to distribute the equity among the investors with the right equity calculator.
