In my post addressing the investor need to offer acceptable terms to entrepreneurs, I mention that to investors winning the deal may be less important than protecting their investment. By “protecting” I am referring to both the need for incentive alignment in the ownership structure and the VC’s need to have an ownership level that provides them with risk adjusted returns. As a result, VCs are often willing to miss investment opportunities that do not provide them with a sufficient stake in the company.

Target Ownership
Professional VCs and angels generally have target ownership levels for their investments. In other words, they have guidelines about the percentage of the company that they expect to own for their invested capital. These ownership levels aren’t hard-and-fast numbers, but rather, they are guidelines to help investors avoid drifting too far from their core strategy over time. Generally, these target ranges are simply a reflection of their investment strategy. If you consider the average pre-money valuations at the stage at which they invest and the size of their typical investment you can quickly deduce an investor’s typical ownership levels.

It is worth noting that since investment strategies do vary by firm, the target ownership levels can differ substantially. Some investors seek to be the sole investor in a company and therefore write a bigger check than investors that prefer to syndicate (share the investment). Those who provide the entire investment often target a greater ownership percentage.

Taking an investment from one firm versus a syndicate does not, however, mean that an entrepreneur will give away more or less of their company - this merely indicates how the new equity is distributed. For example, a single investor could buy 30% of the company for $1 million or two investors could each buy 15% of the company for $500K. Either way, 30% of the company is sold for $1 million.

While most investors do not have rigid ownership requirements, the designated target ownership levels do serve as an important metric for VCs as they help investors know when to walk away from a deal.