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Ask HN: Potential investor wants to partner for equity

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Re: Ask HN: Potential investor wants to partner for equity

#11

Post by mchannon »

Had a similar situation a couple decades ago that blew up in my face. Here are the countermeasures I should have insisted upon:

1. No deal is too good to walk away from. As soon as I smelled something, I should've said, "Thanks but no thanks."

2. You run a straight Delaware C corporation, not an LLC. If there's preferred stock the investor gets none of it. Use a boilerplate vesting schedule that lets you cut the investor loose if they turn toxic.

3. You retain access to the corporate checkbook. If investor balks, run away from the deal screaming.

4. If your investor has a change of heart (or health event, or divorce, or drug problem) in the next 9 months, it will be harder to raise money without his full buy-in than without his involvement at all. "Why isn't so-and-so putting in any of his money for this next round?"

Re: Ask HN: Potential investor wants to partner for equity

#12

Post by romerocarlos »

Hiring a temporary partner with extensive industry experience and connections can be a great opportunity for a pre-seed startup, however, there are several important considerations to keep in mind.

Carefully consider how much capital to offer based on the value the angel investor will provide in the short term, and structure an agreement reviewed by a qualified startup attorney to protect your interests. Do not sign anything without fully understanding the terms and implications. Good luck.

Re: Ask HN: Potential investor wants to partner for equity

#13

Post by RichardDL »

romerocarlos wrote: post #12

Hiring a temporary partner with extensive industry experience and connections can be a great opportunity for a pre-seed startup, however, there are several important considerations to keep in mind. Carefully consider how much capital to offer based on the value the angel investor will provide in the short term, and structure an agreement reviewed by a qualified startup attorney to protect your interests. Do not sign…

Great points, thank you very much!

Re: Ask HN: Potential investor wants to partner for equity

#14

Post by RichardDL »

brudgers wrote: post #10

What are some things that we should be wary of? Lack of long term commitment. It makes for a misalignment of interests. For example, leaving your company and reentering the market as a competitor. Or keeping leads on the side for their future company. Think about how your company will be able to make sales once the salesperson leaves. Good luck.

Yep, you are right, we are hoping that he would bring someone in to replace him afterwards. Or at least help us find someone. And with equity he would be invested into making this a success

Re: Ask HN: Potential investor wants to partner for equity

#15

Post by RichardDL »

mchannon wrote: post #11

Had a similar situation a couple decades ago that blew up in my face. Here are the countermeasures I should have insisted upon: 1. No deal is too good to walk away from. As soon as I smelled something, I should've said, "Thanks but no thanks." 2. You run a straight Delaware C corporation, not an LLC. If there's preferred stock the investor gets none of it. Use a boilerplate vesting schedule that lets you cut the inve…

I especially like the point number 4. A lot of our plan would be hinging on him. And if things go wrong, it would be super painful and difficult to recover.

He wants to be a lead investor too. He just wants to be more than just an angel investor and help us. So we are thinking of taking some of the investment for X% and then suggesting a vesting schedule based on ARR. Like the e1g said in the comment below. 2% for every 100k ARR up to 10%

Re: Ask HN: Potential investor wants to partner for equity

#16

Post by brudgers »

RichardDL wrote: post #14
brudgers wrote: post #10

What are some things that we should be wary of? Lack of long term commitment. It makes for a misalignment of interests. For example, leaving your company and reentering the market as a competitor. Or keeping leads on the side for their future company. Think about how your company will be able to make sales once the salesperson leaves. Good luck.

Yep, you are right, we are hoping that he would bring someone in to replace him afterwards. Or at least help us find someone. And with equity he would be invested into making this a success

Hoping is not a plan.
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