Entrepreneurs need to have enough skin in the game
Entrepreneurs need capital over the life of their business and that involves taking capital in a number of sequential rounds. Each time they take a round they’re giving up a part of their company but if they dilute too quickly they're not going to be incentivised to continue.
When crafting a deal you want to make sure that entrepreneurs can get more capital at every stage and still feel like they’ve got skin in the game. So I put a lot of my energy into balancing the right valuation with the right cap table structure for future growth. I want to know that by the time the entrepreneurs have got all the capital they need to exit they will be rewarded – this incentivises them throughout the process.
Generally at exit you want the founders to have at least around 30% so work backwards from there. At the angel or seed stage, investors shouldn’t take more than 30% (not just for cap table reasons, but also for the practicality of maintaining ESIC eligibility). Another couple of rounds may take up another 30% to 40% - although it's hard to assess how much equity they're going to need to give away in those series A and B rounds. You also don't know exactly when revenue will kick in, how much growth they're going to need to pay for and how much will happen organically.
This means thinking about capital requirements for the entire journey. But not all entrepreneurs are aware of their capital requirements upfront. The good ones can tell you where they want to be in 10 years time and how they're going to take over the world - that's when it gets really exciting.