Steven - Congratulations on having this problem that everyone would love to have. What you really need is good understanding of the valuation of your company. You can go about by calculating NPV (Net Present value) which is the present value of the future cash flow your company is expected to generate. You will need make assumptions around number of customers and expected revenue for the next 5 years and discount it to present day dollars. You can then decide how much partnership you want to sell at that price.
Try to talk to some of the colleagues who may have gone through similar situation. Also, consulting with a SCORE counselor is a good idea if one is available in your city.
Adding to the very good advice that AngelBiz offered, discuss this very important issue with your CPA. Hopefully you already have one that will grow with your business and offer you great financial advice. Good luck and let us know what you have decided.
I think your question should be more about this: Do you need the investment - really need it? Can you take that investment and accelerate your growth and bring back more in value then that investment will cost you in terms of giving up equity. If you don't really need the money - skip it or tell the person to come back later.
Ownership share for investment is really based on valuation - both pre- and post-money. If your company is worth $200,000 pre- investment and the person puts in $20,000 equity - then that person's ownership should equal - $220,000 (post money) divided by the investment $20,000 or 9%. The hardest part of all of this is agreeing on the valuation pre-money.
If you want to see some quick issues related to taking on a partner, check out the TV show Shark Tank. It will not answer all of your questions, but it should open your eyes about some challenges related to taking on an additional owner.
A 20% partner is a significant change to your business. Will this partner be part of all management decisions? Beyond money, what skills does this partner bring to the organization? What is his/her experience and how does that add (not duplicate) the skills of current owners? Can you hire these skills without taking on a partner? Can you obtain a loan as an alternative to a new investment?
I do not know who your potential investor is, so I make no value judgments about that person or his/her reasons to invest. However, taking on a partner is a decision that is part financial, part management, part cultural, and part strategic. If you fail to consider all of these issues, you may be limiting your future potential.
I agree with Richard. Why do you need an investor if your company is doing so well? Giving away a percentage of your company now for a few thousand dollars could be costing you millions just a couple years from now. If you don't need the money, don't sell.
Look for a line of credit or some other solution.
We have a business which has really begun to pick up in the past month. We were simply getting our feet wet the first two years in business, but after our last collection was released we have gained international support and consumers. Our local city has also shown us support and are willing to give us a store front free of charge plus a grant. Recently a local investor has come across our company.
Basically he wants to invest in the company because he sees the limitless potential. However not only does he want to invest, he also wants to be a partner. He is asking for 20% of the company. This is a company that can potential be worth millions in 2 years. With his initial investment offer, the company is worth roughly $250,000.
So my question to you is, what would be the best thing to do? Should we give him 20% ownership, and if so for how much? Your advice would really be helpful. If you have anymore questions feel free to ask. I wanted to make it as brief as possible. Thank you.