How much equity does a VC take when funding a startup?

I think you're putting the proverbial cart before the horse with this question. Investors of any sort who have experience with startups don't invest in ideas because ideas are, frankly, a dime a dozen. They invest either in teams with proven track records (so called "serial entrepreneurs") or in successful, active businesses that need capital to grow bigger or faster.

To say you have a good idea and realize that you haven't taken even the first step in birthing the business suggests to me that the best advice I can give you is to go, build, launch the company, gain some customers, demonstrate some sort of proven revenue stream, and then start to ask yourself about investors and investment.

You're also citing two of the largest companies on the net, two companies that in their own ways are helping bring about a revolution in business.

Amazon from day one has been focused on building a back-end infrastructure for online commerce, with its bookstore really just a 'proof of concept'. The company has an extremely deep level of sophistication in all things technological.

eBay, in a similar vein, has been all about creating a marketplace for buyers and sellers, producing an amazing online venue where they take a slice of every transaction without ever having to inventory or warehouse a single widget. Brilliant, and, again, a phenomenally savvy company.

I encourage you to aim high, but realize that if you can achieve even a small fraction of their success, you'll have built an amazing company and will deserve all the rewards you would gain.

In terms of percentages, I feel that in a lot of way you're far ahead of yourself. VC investments are based on the amount they'd invest and the valuation of the company, so there's no fixed value. A common scenario, however, is for a VC to buy 20% of a company, where that might look like this:

  • pre-money company valuation: $5 million
  • VC investment: $1 million
  • post-money company valuation: $6 million
  • founder equity stake: 80%
  • VC equity stake: 20%

There's a lot more to it than that, and you really need to ask yourself "how do I create a living business that's really able to sustain a valuation of $5 million dollars?" That's not easy! There are companies that are quite the buzz on the Web, have lots of subscribers and a small revenue stream, yet aren't worth even half of that valuation. And trust me, any investor with experience will spend much of their time scoffing at your valuation and trying to push it down to be the smallest reasonable number they can achieve.

(the reason should be obvious: if the fictional company we're talking about was worth $2 million, then that same $1 million investment, for example, would buy the VCs 50% of the equity in the firm, not 20%)

Private company valuations are rarely disclosed, even after funding events, too, because it's a critical number for competitors to learn. If you know that your competition is worth, say, $2 million, then you could then make some savvy extrapolations about what various facets of their business are worth.

Anyway, here are a few links for your reading list:

• VC Brad Feld's Weblog -- Brad has a wonderful way of being blunt and direct with his commentary, an excellent track record of success with his investments, and a deep knowledge of the entire Internet. He also writes about VC issues with frequency, and it should unquestionably be required reading for you.
• Growing Your Business with Google -- This is the Web site for my book of the same name, a much-lauded guide to the future of business, it'll illuminate much of your path to becoming a thriving business of tomorrow. Pay particular attention to the chapter What's Your Core Business? too!
• Startup 101 Info -- I present a couple of tutorials I wrote for IBM on small business issues on this site, and the one I think you'd find most useful is How to present your startup to investors. I think it'll be a good reality check for your aspirations versus your accomplishments at this juncture.

I applaud your enthusiasm and encourage you to get started building your business, make it a viable entity, then start thinking about investments. Otherwise you'll just waste your energy at this point in your company's history.

Good luck!