What is a reasonable percentage of equity that I should expect to give up to an angel investor in exchange for their investment?

Jeff,

Very often Angels won't set a valuation (the basis of the % they get based on their investment. The variant reasons include that they aren't in a position to set a valuation, as compared to VCs and PE firms they don't have the depth of resources to do this. So, on the surface, the answer is "probably not relevant".

However...I don't think that is a useful answer so I'll try to give you a few data points and tools to point you in the right direction.

Assuming you're dealing with the same Angels I am, you'll be in one of two camps: convertible debt or convertible equity. In the former, no valuation is necessary *unless* you have a capped convertible. The cap is going to determine the minimum % they will get, with the floor for triggering conversion determining the maximum.

Convertible equity is a slightly different beast and more often than not requires some conversion price because, as it is not debt, there is no repayment option. The basic structure is that they get one of three %s:
1) whatever the A round determines the valuation to be, they get to invest based on that valuation (usually at a discount).
2) if the A round is really great, they get at least a minimum % based on a valuation cap.
3/4) if there is no A round (regardless of whether it is because everything went south, or you did so well you don't need the money) they get converted at a different, lower cap.
Basically, you'll want to model all four scenarios to figure out what the % ownership differential is. When you do this, note that although the "I didn't need an A round, so now I'm giving up more of my company" seems like a bad outcome...the upside there (in that relatively unlikely event) is to a degree deserved by the Angels because they are risking their money.

That all is background: SVB was nice enough to post some stats today. Note that geography and sector are as important as team, technology and traction. At this point you're a very uncertain commodity, so the market for playing in that market is very important. The easy answer is "their investment / $2.7M pre"....but that's just an average.

SVB docs are here:
http://www.svb.com/halo-report/?utm_source=onpoint&utm_medium=email&utm_campaign=onpoint-1012

Kent posted a helpful valuation sheet here;
https://www.proformative.com/resources/pro-forma-cap-table-liquidation-analysis

A convertible equity flavored sheet is here:
http://www.scribd.com/doc/104376082/Form-of-Convertible-Security-Term-Sheet

A far more comprehensive (so delete a lot of the stuff and let your investors negotiate for what they want) convertible note template is here;
http://www.docracy.com/2740/convertible-note-term-sheet-template-

The Y-combinator Series AA (basically a preferred angel series) docs are here:
http://ycombinator.com/seriesaa.html

Cheers,

Keith

And more data on valuations (for A and beyond, so not directly helpful to you but good data to review all the same) from our friends at Wilson Sonsini Goodrich & Rosati.
http://www.wsgr.com/publications/PDFSearch/entreport/Q42011/private-company-financing-trends.htm

Good info Keith. In my experience, some angels will want to set valuation and when they do, I find that they want to own 20% to 40% of the business - so the valuation is typically based on the amount of money that you want to raise. The earlier the stage, the higher the risk, the lower the valuation, the more you have to give up. 20% to 40% may seem high but when you consider that they are taking the early risk and almost always more capital will be required before the Company gets to profitability, they have to factoring future dilution in order to achieve their target ROI on the investment made. One word to the wise - make sure that you understand all of the terms being offered, not just the valuation or they can cost you a lot of money in the long run. For example, a liquidation preference can be participating or non-participating and the difference can be a big number. Get good advisors to guide you before you sign a term sheet!

Observe the Cardinal Rule: Only deal with professional investors who know what they are doing. In every situation you want more than money. You need expertise and mentoring.

All of the previous posts make really good sense. Based upon my experience with my Client base I can tell you that there are no hard and fast rules on valuation and what percentage to give away at various stages.

Before deciding the dilution percentage, I'd encourage you to set a reasonable valuation. By reasonable, consider these data points:

1. Is the business model revolutionary and disruptive or just a new and improved of something that is already in the market? (If the former-higher; if the latter-lower)

2. How much capital (actual cash) has the founder already invested in the business relative to the size of the upcoming round? (If none-lower; if more-higher)

3. Is there revenue & profitability currently being generated in the business model? (If none-lower; if some-higher)

4. Are there other publcly traded or VC/PE transactions to establish a precedent for valuation? (If non-lower; if precedent exists-common basis to support valuation)

I've seen Clients in the past established really high valuations only to be disappointed in the results of the subsequent raise due to valuation concerns. If you need the money to build a business, then you've got to allow for your investors (especially the early ones who have higher risks) to see a path to a Return on Investment.

Once you've considered the above factors, I've counseled Clients to generally follow these dilution %'s for each round of funding:

1. Friends & Family-5%-10%
2. Angels-10%-20% (total dilution including earlier rounds)
3. VCs-20%-45% (total dilution including earlier rounds)

Hope this helps. Good luck!