Please Share Your Thoughts
27 comments
Just as a gut check: 25% of the company for 200k is a lot of equity for a low price. That's a yellow flag to me. It says to me that the investor doesn't think the company will grow huge and/or there should be room for future investors.
I'm not sure what you product or idea is, but companies where technology is the core tend to have all founders (or N-1) capable of building product. You have 1 of 3, so what are those other two folks doing? Again, a yellow flag. In terms of the business, I'd worry this is going to be low margin, if it takes 2x as many sellers to sell as it takes builders to build, from day 1.
Technology is leverage, and you're the only one building the lever that lifts this company off the ground. My advice is to make sure your founders understand this and to make sure all three of you are focused on building a true MVP. You need to build something that is easy to set up, easy to use, and delivers true value. Your cofounders will smooth over some of the rough edges, but push hard on making sure you're aiming for product-market fit in a good market.
If not, you'll end up as the IT group for a consulting business. It's not a bad gig, but it's not the startup journey you've probably come to this website to talk about.
I'm not sure what you product or idea is, but companies where technology is the core tend to have all founders (or N-1) capable of building product. You have 1 of 3, so what are those other two folks doing? Again, a yellow flag. In terms of the business, I'd worry this is going to be low margin, if it takes 2x as many sellers to sell as it takes builders to build, from day 1.
Technology is leverage, and you're the only one building the lever that lifts this company off the ground. My advice is to make sure your founders understand this and to make sure all three of you are focused on building a true MVP. You need to build something that is easy to set up, easy to use, and delivers true value. Your cofounders will smooth over some of the rough edges, but push hard on making sure you're aiming for product-market fit in a good market.
If not, you'll end up as the IT group for a consulting business. It's not a bad gig, but it's not the startup journey you've probably come to this website to talk about.
It is not safe to assume that this idea has the potential to become a billion dollar company.
We also have to take into account that OP, as a founder, might inspire more or less confidence, and hence influence the "valuation".
200k for 75% of a business might be a good thing, depending on what type of business we are talking about.
We'd need more data for a more meaningful evaluation.
We also have to take into account that OP, as a founder, might inspire more or less confidence, and hence influence the "valuation".
200k for 75% of a business might be a good thing, depending on what type of business we are talking about.
We'd need more data for a more meaningful evaluation.
It sounds like OP is keeping 25%, with 75% going to the three new guys.
For 200k.
For 200k.
I read it as 75% of the company being split among the 3 founders.
It's not clear to me there's a real company here with only the OP. I don't think it's unreasonable to assemble a founding team in the way it's been described.
It's not clear to me there's a real company here with only the OP. I don't think it's unreasonable to assemble a founding team in the way it's been described.
Write a solid term sheet if you’re going to go through with it. Examples of shenanigans that can be pulled that a term sheet would address:
* With an even split, in theory any two employees could declare a 200k dividend and walk away with 50k in pocket on day one.
* Similarly, the CEO and chairman could decide to oust you if things start going well since they own half the company.
* Where’s the stock pool for potential future employees? Does the equity stake you/other founding members get have a vesting period so they have incentive to stick it out?
There’s more but you get the idea.
* With an even split, in theory any two employees could declare a 200k dividend and walk away with 50k in pocket on day one.
* Similarly, the CEO and chairman could decide to oust you if things start going well since they own half the company.
* Where’s the stock pool for potential future employees? Does the equity stake you/other founding members get have a vesting period so they have incentive to stick it out?
There’s more but you get the idea.
I'm no expert but...
You could see if you can attract funding from elsewhere too if you feel the current terms aren't right. There are rolling funds such as these https://shl.vc https://tinyseed.com that have short turn around times, if you want to try your luck. Chances are, there are others who are just as willing to fund you but haven't heard from you to know what you're building. Good deal makers are always in a rush to close you out if they think you're of value, so tread with caution and keep your counsel.
Also, I guess it pays to keep enough voting rights over the board, as this cautious story would like to remind us all: https://news.ycombinator.com/item?id=24814268
You could see if you can attract funding from elsewhere too if you feel the current terms aren't right. There are rolling funds such as these https://shl.vc https://tinyseed.com that have short turn around times, if you want to try your luck. Chances are, there are others who are just as willing to fund you but haven't heard from you to know what you're building. Good deal makers are always in a rush to close you out if they think you're of value, so tread with caution and keep your counsel.
Also, I guess it pays to keep enough voting rights over the board, as this cautious story would like to remind us all: https://news.ycombinator.com/item?id=24814268
In the Captain Obvious category: have you considered signing up for YC's free online Startup School?
Edit: Recent post related to it, just to make it easier to find if you/someone wants to sign up.
https://news.ycombinator.com/item?id=24944460
Edit: Recent post related to it, just to make it easier to find if you/someone wants to sign up.
https://news.ycombinator.com/item?id=24944460
So your company will have:
- one guy building the product;
- two executives;
- another full-time guy "providing information from within the industry and leveraging his extensive network".
If your executive team doesn't have industry knowledge or a network (since they're hiring a guy full-time to provide that), and isn't building the product (that's you), what exactly are they doing, and why do you need two of them?
- one guy building the product;
- two executives;
- another full-time guy "providing information from within the industry and leveraging his extensive network".
If your executive team doesn't have industry knowledge or a network (since they're hiring a guy full-time to provide that), and isn't building the product (that's you), what exactly are they doing, and why do you need two of them?
Sounds like a classic case of non devs saying ‘I have a great app idea, just need someone to build it’.
1. 25% equity for 200k EUR (=800k valuation) is a bad deal. This is the hottest ever seed-stage funding environment, even in Europe. People are raising at 5m+ valuations on a slide deck alone. If you were to raise from professional venture capitalists (angels/funds), even at this early stage you would most likely get a much better deal.
2. Hold on... a four-way 25% equity split? You mean you've built a product from scratch, and now you want to give away 75% of the value to a bunch of random guys? I wouldn't do that.
3. And you don't even get to be the CEO/Chairman? The money guy is going to be a part-time CEO? That's a recipe for failure.
Run, don't walk. This is a terrible deal. You seem to have built something of value and you're about to throw it away. Bootstrap your business for a couple of months -- build a product, validate there's interest for it -- and then seek real funding.
Usually you can get all the intel/network about the "industry" that you need by spending less than 2% equity on advisors, or by spending a couple hours with a knowledgeable paid consultant.
2. Hold on... a four-way 25% equity split? You mean you've built a product from scratch, and now you want to give away 75% of the value to a bunch of random guys? I wouldn't do that.
3. And you don't even get to be the CEO/Chairman? The money guy is going to be a part-time CEO? That's a recipe for failure.
Run, don't walk. This is a terrible deal. You seem to have built something of value and you're about to throw it away. Bootstrap your business for a couple of months -- build a product, validate there's interest for it -- and then seek real funding.
Usually you can get all the intel/network about the "industry" that you need by spending less than 2% equity on advisors, or by spending a couple hours with a knowledgeable paid consultant.
It's 75% of equity for 200k, or ~266k valuation.
First, before making any decision, do a coin flip: https://blog.allpsych.com/why-flipping-a-coin-is-a-good-way-...
Second, you'll need someone that good at pitching (investor and customer) inside your circle. Try your best to not hire one, since it may be expensive.
Third, make minimum viable product, no less.
Last, hope for the best of luck, since it's also play an important part.
Second, you'll need someone that good at pitching (investor and customer) inside your circle. Try your best to not hire one, since it may be expensive.
Third, make minimum viable product, no less.
Last, hope for the best of luck, since it's also play an important part.
Thanks. I apprecite the input.
I'm going to start off assuming that you're relatively well-off and your quality of life wouldn't fall off a cliff if you spent 1.4 years on this and failed. If that's not true, you should probably pass (because most startups fail).
Ultimately, you want to maximize your expected value per year of work.
Expected Value = Probability of success * Business Value * Your Equity Stake
When estimating the startup's probability of success, you should take into consideration that it's abnormal to have only 1 technical founder in a team of 4 (assuming this is a tech startup). It's also abnormal that two founders are part-time. These abnormalities should decrease your estimation for probability of success. If you don't feel confident choosing a success probability, I would advise using 20% (based on what you've mentioned).
To estimate the startups' business value, first make an educated guess at how much profit the company will make per year if successful. Then, multiply this yearly profit by 5-10 to get a business value estimate. (Note: the 5-10 multiple actually depends a lot on your industry, and how sustainable the business is. You can find comparables by looking at P/E ratios for similar businesses being sold in your industry).
Once you've figured out what your expected value is, divide it by the number of years it will take you to reach success.
Then, compare this Expected Value / Year to your alternatives to determine if it's a good opportunity.
A final note: Startups are all about execution. Good ideas are a dime a dozen. Ultimately, the CEO/chairman is planning on bringing ideas and letting you and one other person execute. That means you will likely be pounding pavement while he is nowhere to be found. If this personal dynamic irks you, you should think about negotiating the equity split so you feel well compensated for your sweat equity.
Ultimately, you want to maximize your expected value per year of work.
Expected Value = Probability of success * Business Value * Your Equity Stake
When estimating the startup's probability of success, you should take into consideration that it's abnormal to have only 1 technical founder in a team of 4 (assuming this is a tech startup). It's also abnormal that two founders are part-time. These abnormalities should decrease your estimation for probability of success. If you don't feel confident choosing a success probability, I would advise using 20% (based on what you've mentioned).
To estimate the startups' business value, first make an educated guess at how much profit the company will make per year if successful. Then, multiply this yearly profit by 5-10 to get a business value estimate. (Note: the 5-10 multiple actually depends a lot on your industry, and how sustainable the business is. You can find comparables by looking at P/E ratios for similar businesses being sold in your industry).
Once you've figured out what your expected value is, divide it by the number of years it will take you to reach success.
Then, compare this Expected Value / Year to your alternatives to determine if it's a good opportunity.
A final note: Startups are all about execution. Good ideas are a dime a dozen. Ultimately, the CEO/chairman is planning on bringing ideas and letting you and one other person execute. That means you will likely be pounding pavement while he is nowhere to be found. If this personal dynamic irks you, you should think about negotiating the equity split so you feel well compensated for your sweat equity.
Follow your gut and don't try and build something too fancy before you've proved out the idea.
Counteroffer: Accept $200k for 10% of the company, you retain 90%. Use this 200k to build the product. Hire another developer for cash. Maybe 1-5% equity if you have to. The other glorified sales person (providing "inside knowledge and industry contact"... sounds dubious) can work as much as he wants on a pure-commission basis.
The CEO is expected to work for the company for free at a minimal level... that's probably all he was planning to do anyway. Any investor putting cash into a young company should be willing to leverage their own expertise and contacts to make that company successful, since that's the only way they will see a return on investment. You don't need another un-named executive at this stage.
One additional thought: you talk about an "interest-free investment" that can also be reduced by 40k/yr. That sounds like a loan. There's something odd going on here: why would anyone invest in a company they think is going to be huge, but then also allow you to buy them out for no interest? Something doesn't add up.
The CEO is expected to work for the company for free at a minimal level... that's probably all he was planning to do anyway. Any investor putting cash into a young company should be willing to leverage their own expertise and contacts to make that company successful, since that's the only way they will see a return on investment. You don't need another un-named executive at this stage.
One additional thought: you talk about an "interest-free investment" that can also be reduced by 40k/yr. That sounds like a loan. There's something odd going on here: why would anyone invest in a company they think is going to be huge, but then also allow you to buy them out for no interest? Something doesn't add up.
I just came of an accelerator programme a few months ago i.e. I'm in this world. I think you are asking one question but reader's minds will be flagging another.
In particular, the low level of funding and the complexity of terms before your bum has even landed in your own seat.
I think connections are priceless in this life. I would caution you however that you may be underestimating how valuable your skills are to investors.
The free YC online startup school someone else mentioned sounds like a good idea.
In particular, the low level of funding and the complexity of terms before your bum has even landed in your own seat.
I think connections are priceless in this life. I would caution you however that you may be underestimating how valuable your skills are to investors.
The free YC online startup school someone else mentioned sounds like a good idea.
I have so many questions ..
1) Is the 200K euro investment a loan that must be paid back at 40K/year, or is it equity investment? (or a convertible note?)
2) What % time is the CEO + Chairman dedicating to the company? Why is the final member getting 25% equity for being chairman? What value is the chairman bringing to justify the equity? Does the 25%-chairman provide some of that 200K?
3) How does the existing company view their CEO becoming CEO of a new company? Or him taking two people out of that project and putting into yours? How would you feel if he took people out of your company and started a 3rd company with someone else?
Here's my advice: Startups are hard enough to do with people committed full-time, or 120% even. If we're talking about a scalable start-up and not a lifestyle business, if you guys will go raise again, no one will invest into a company where 2 part-time guys own 50% of the equity, where the CEO is a part-time person with another company to run. Any new investor, or customer for that matter, will require your team to be fully committed to your company - if not, why should they commit as an investor or customer?
After all you are quitting your job.
There are certain exceptions - some biotechs are co-founded by well known professors, or if your CEO is Steve Jobs, Elon Musk etc.
As it stands this doesn't seem to have the right structure, right incentives, and right economics built-in.
Try to recruit a full time co-founder who knows the industry you're targeting. If you fail to do that, perhaps that's a good indication that the idea is not amazing. After all, you're trying to convince someone to get paid for doing the idea. Soon, you'll have to convince customers to part with their money :)
Also, if your idea is good, you can raise money from a seed-fund with a better structure. You can even tell those funds the story about this CEO etc. If the seed funds pass, you can ask them genuinely what they didn't like.
1) Is the 200K euro investment a loan that must be paid back at 40K/year, or is it equity investment? (or a convertible note?)
2) What % time is the CEO + Chairman dedicating to the company? Why is the final member getting 25% equity for being chairman? What value is the chairman bringing to justify the equity? Does the 25%-chairman provide some of that 200K?
3) How does the existing company view their CEO becoming CEO of a new company? Or him taking two people out of that project and putting into yours? How would you feel if he took people out of your company and started a 3rd company with someone else?
Here's my advice: Startups are hard enough to do with people committed full-time, or 120% even. If we're talking about a scalable start-up and not a lifestyle business, if you guys will go raise again, no one will invest into a company where 2 part-time guys own 50% of the equity, where the CEO is a part-time person with another company to run. Any new investor, or customer for that matter, will require your team to be fully committed to your company - if not, why should they commit as an investor or customer?
After all you are quitting your job.
There are certain exceptions - some biotechs are co-founded by well known professors, or if your CEO is Steve Jobs, Elon Musk etc.
As it stands this doesn't seem to have the right structure, right incentives, and right economics built-in.
Try to recruit a full time co-founder who knows the industry you're targeting. If you fail to do that, perhaps that's a good indication that the idea is not amazing. After all, you're trying to convince someone to get paid for doing the idea. Soon, you'll have to convince customers to part with their money :)
Also, if your idea is good, you can raise money from a seed-fund with a better structure. You can even tell those funds the story about this CEO etc. If the seed funds pass, you can ask them genuinely what they didn't like.
Terms aside, I would be careful about making judgements of whether you want to cofound a company with someone within the span of a few weeks-a month, not sure your exact timeline here. People can be very charismatic when you have the ability to build what they want and they want you to make them money. Also what do you need a chairman for that the CEO can't do?
> The other paid employee will be dedicated fulltime to providing information from within the industry to fill gaps in my knowledge and leverage his extensive network.
What does this even mean? He keeps his existing job inside the industry and feeds you tips for $? He's a glorified sales role?
These guys look more like friends than business partners.
What does this even mean? He keeps his existing job inside the industry and feeds you tips for $? He's a glorified sales role?
These guys look more like friends than business partners.
You absolutely need to hire your own lawyer.
Also a 4 person startup doesn't need a CEO and Chairman.
Also a 4 person startup doesn't need a CEO and Chairman.
there are some resources I hope can help you:
book:
The Lean Startup: How Today's Entrepreneurs by Eric Ries
Startup CEO_ A Field Guide to Scaling Up Your Business by Matt B
Startup: An Insider's Guide to Launching and Running a Business
lectures:
Startup Engineering [Coursera] [Stanford] [2013]
startup courses at YC
The Lean Startup: How Today's Entrepreneurs by Eric Ries
Startup CEO_ A Field Guide to Scaling Up Your Business by Matt B
Startup: An Insider's Guide to Launching and Running a Business
lectures:
Startup Engineering [Coursera] [Stanford] [2013]
startup courses at YC
The equity split (get that in writing) is pretty good. Usually I read the idea+initial money person tries to keep majority control.
Lately I recommend https://ofone.co/ to bootstrappers to think long-term and sustainable instead of raising external money rounds and trying to double revenue every month. Different philosophy and might not align with the goals you have.
Lately I recommend https://ofone.co/ to bootstrappers to think long-term and sustainable instead of raising external money rounds and trying to double revenue every month. Different philosophy and might not align with the goals you have.
Thanks for the resource.
I am a fullstack engineer with 10+ years of experience in corporate, government, digital media agencies and two startups. A few months ago I started building a small side project to solve a problem that I found interesting. I hit a wall eventually and figured I may be able to speed up my progress if I spoke to someone with more industry knowledge. I spoke to some family who put me in contact with the CEO of a relatively successful company in this field who would be willing to lend an ear to my questions as a personal favour to my family member. Over the course of several weeks we built up a great relationship and further developed this little side-project as well as discussed some of his ideas on ways to further innovate in the industry.
To cut a long story short; he offered €200k in funding to quit my job and co-found a seperate business with him and two of his existing employees. The investment is interest free and can be reduced by €40k per year. The funding is being offered in a personal capacity and is not coming out of his existing company. There will be a 25% equity split four ways with the goal of further developing some of the ideas we have discussed to date.
Myself and one other employee will split the funding as salaries (totalling 1.4 years of runway). I will be the technical arm of the business. The other paid employee will be dedicated fulltime to providing information from within the industry to fill gaps in my knowledge and leverage his extensive network. The CEO and the final member will act as executives in the company (CEO and Chairman) and will work to get the business profitable as quickly as possible.
Broadly; what can I do in these extremely early stages that set will set the business on a trajectory for success? I plan on seeking a start-up mentor that I can regularly check in with - is this a good idea? If you have any thoughts, suggestions, books, or whatever to offer, I would be extremely grateful.