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What does a typical VC arrangement look like? I know that is a vague question, but for example, if a VC company invests say $1,000,000 in a tech company, how does the VC company get a return? Is it a percentage, payments, or a combination of both? Is there an industry standard percentage or does it vary wildly? I am trying to understand if this is the best way for a company like mine to go. Thank you for your advice.
Typically, VCs buy stock in the company. If they give you $1,000,000 they become part owners. How much of the company they own is based on the valuation of your company, which is suggested by you, but inevitably determined by the VCs.
There is both a pre-money and post-money valuation. Lets say that you are valuing your company at $2 Million. This is your pre-money valuation. If you then raise $1 Million dollars you have a post-money valuation of $3 Million. The VCs now own 1/3 of your company.
Now depending on how far along you are determines the valuation - If its a start-up with no customers its a lot lower than a running company that is already generating revenue.
Remember, the VCs are in this to make money. They want big returns at the end of the day. If you are looking to take $1 million and pay them back $1.4 million in 2 years, then you should not be raising money from VCs.
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