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Ask HN: How much is too much?

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Re: Ask HN: How much is too much?

#21

Post by andrewem »

seaking wrote: post #15
patrickgzill wrote: post #6

What exactly does he define "vicariously living the startup life" as ? It seems that the answer to this might give you a lot more insight.

Yea, we've been wondering that ourselves. :) We've already gone through the DD process with him and his lawyer, and a new shareholder's agreement has been drafted. It has verbiage in it that basically allows him to come on as a voting shareholder, with the ability to ascend to a director once he feels "he is ready". His readiness is mostly contingent on industry knowledge. We're in a space that is largely unknown to…

In business relationships as in personal relationships, the courtship period is where people take the greatest pains to be on their best behavior.

Thus far, the potential investor has shown himself to be uninterested in direct interactions that would let you get more comfortable with each other, and nothing in his behavior provides reason to expect he'll suddenly become helpful and acquire a deep understanding of your business once he's your partner.

Re: Ask HN: How much is too much?

#22

Post by srgseg »

On the basis that he's putting in $250k cash at a post money valuation of $750k:

What really determines whether this is fair is down to what a 'home run' would look like.

If you are getting some traction towards a possible goal of $xx million a year if all of your ducks line up, then $500k pre money sounds low.

But if you're not going for such a big win, $750k post money for a company with that kind of burn rate sounds reasonable to me. Putting $250k cash into a company with no revenues is an incredibly risky thing to do, and he quite possibly well deserves a third of your company for taking that risk.

So much of this comes down to market opportunity and how impressive your traction is.

Re: Ask HN: How much is too much?

#23

Post by petervandijck »

seaking wrote: post #12
mbyrne wrote: post #5

The quick answer if that if you are going to sell 1/3 of your company for two months of ramen noodles then you don't really think much of it. Already I can tell this guy is not an angel, he smells blood. Plus he's running his company full-time but wants to be a one third partner? When? on weekends? You said you would give numbers but then don't. How much money do you need to survive two months? or is it not two month…

Ah yes. My apologies. Our current burn rate is about $20k a month, which includes modest founder salaries (not quite enough to pay the bills, but it helps). Most of our burn is actually for third-party data providers, which are essential to our business at this time. We do think we're close to revenue, but it may be a few months longer before we're actually cashflow positive. I'll be honest -- there's a divorce betwe…

Follow your gut, for real.

Shop around for a better deal.

Also remember, your "we just need a few months" is probably off. You'll likely need more than that.

Re: Ask HN: How much is too much?

#25

Post by pghimire »

LeBlanc wrote: post #2

Given that this angel wants an equal stake and directorship, and has said that he wants to live the start-up life vicariously through you I would expect him to be quite hands on in his role with your company. Expect him to try to make a lot of decisions about how the company should be run. So, don't bring him on unless you would also be comfortable having him as a co-founder. I would recommend trying to stick it out.…

Thanks for posting the link LeBlanc.I had not seen that. Very inspiring.

-Pete

Re: Ask HN: How much is too much?

#26

Post by trizk »

Never give away control of your company for money. If the investor had your vision he would have built it without you. What is going to happen is you are going to fight over the direction of the company until it ultimately fails. The is especially true in equal partnerships. Disagreement quickly leads to stalemate.

The amount of money and valuation are extremely low. Show him examples of funded companies in your space (see CrunchBase) and talk about typical startup valuations based on your space and how far along you are (maybe $1M to $5M). Offer him an investment opportunity of a maximum of 20% of the company for the money he is putting in. That should bring your valuation to roughly $1.5M which is still fairly low and keep you in control of the company for this round and the next.

Re: Ask HN: How much is too much?

#27

Post by aaronblohowiak »

timelinex wrote: post #16
aaronblohowiak wrote: post #10

50% of zero is less than 30% of something. If you go under, your valuation will be 0!

This doesn't say anything about whether to take this guy's money. They can still get money from banks, friends, other angel's or get this guy to reduce his terms. Right now, this guy wants to know what are his options.

I am suggesting that an "Avoid the worst" strategy may be superior to "pursue the best" strategy because the absolute value of "the worst" is far inferior to the margin between this (suboptimal) option that he has and an optimal option that we may only imagine.

Re: Ask HN: How much is too much?

#28

Post by Udo »

I believe you might be underestimating the time it takes to become profitable. You say you're burning 20K per month, that is one hell of an operating budget if you're basically two guys with almost no customers. You said you started a new campaign but results are trickling in slowly, which is normal. It will take time to build a brand and a customer base. Banking on revenue being "just around the corner" is likely to get you into trouble. You're only allowed to give a concrete time frame for profitability if you already have a graph with a growth curve on it that will cross the red line with a decent amount of confidence at a predetermined point in the future. If you're pretty much at zero revenue right now, you cannot draw this line because you don't know the growth factor yet. Sure, a few companies do take off like rockets, but these are outliers that cannot be used to actually make plans for the future.

Sorry to be a party pooper on two accounts, but I don't think this angel guy is going to solve your problems either. One can already sense the tension between you and him, imagine what it's going to be like once he takes over the operation. And when he discovers that this 20K/month hole cannot be plugged, he'll be very pissed and you might suddenly find yourself fighting on more than one front just to make it through somehow.

I don't want to be just negative, but it's hard to give advice without knowing all the facts. In your place I'd probably look into these things:

Can the money drain be reduced to a fraction of what it is now? If that leads to a reduction in service quality, you need to ask yourself if the majority of the expense is actually going into the core offering that customers want from you? Can the scope of this thing be reduced somehow? What do customers actually need from you (concentrate on one core expectation if possible). Can you find money elsewhere, for example by making a business plan and presenting to a VC? Take a very critical look at your revenue expectations: are there any hard numbers you can work with and plan for? Can you partner up with a company in some form of mutually beneficial agreement, possibly reducing your expenses or at least to help you get in contact with a pre-existing customer base?

Re: Ask HN: How much is too much?

#29

Post by seaking »

Udo wrote: post #28

I believe you might be underestimating the time it takes to become profitable. You say you're burning 20K per month, that is one hell of an operating budget if you're basically two guys with almost no customers. You said you started a new campaign but results are trickling in slowly, which is normal. It will take time to build a brand and a customer base. Banking on revenue being "just around the corner" is likely to…

Thanks for the candid thoughts, Udo.

Some brief comments on your response:

- Unfortunately, we have some business-critical costs we incur, so can't do a full slashing. However, we're confident that a couple key vendors that our business relies on will defer payment for a couple months, representing a 50% reduction to burn. We could probably also reduce general costs by 10-20% as well with some real belt-tightening.

- You're probably right about the revenue projections, but we do have our reasons to be optimistic. At minimum, some quick revenues will help make us that much more compelling to other investors if we chose to walk from this deal and throw a hail mary trying to land another investor in the 2 months we'd have to put a deal together.

- We're placing a lot of resources in quickly brokering a distribution deal with a marquee brand in our space. We're extremely confident that we will have something in place in the next two months if our progress thus far is any indication. Landing any of these deals would likely solve our immediate-term money woes, at least enough to stop the hemorrhage.

The question basically comes down to:

Do we take a deal on the table knowing that it will give us 10 months of certain life even though it doesn't feel right in the gut and doesn't even look that good on paper by most measures? Or do we roll the dice, go into bleed mode, and try and land something in the 60 days we'd have to do it (starting Monday), knowing that it's a horrible time of year to get anybody's attention?

Thanks again for the thoughtful response, Udo.

Re: Ask HN: How much is too much?

#30

Post by Udo »

seaking wrote: post #29
Udo wrote: post #28

I believe you might be underestimating the time it takes to become profitable. You say you're burning 20K per month, that is one hell of an operating budget if you're basically two guys with almost no customers. You said you started a new campaign but results are trickling in slowly, which is normal. It will take time to build a brand and a customer base. Banking on revenue being "just around the corner" is likely to…

Thanks for the candid thoughts, Udo. Some brief comments on your response: - Unfortunately, we have some business-critical costs we incur, so can't do a full slashing. However, we're confident that a couple key vendors that our business relies on will defer payment for a couple months, representing a 50% reduction to burn. We could probably also reduce general costs by 10-20% as well with some real belt-tightening. -…

You should probably take what I write with a grain of salt, because I have seen so much stuff go wrong over the time, I tend to be overly cautious.

My (admittedly somewhat unqualified) advice would be:

- Go ahead and slash costs by as much as you can. And then some. If vendors simply defer payment instead of waiving/reducing it, things can get _very_ dangerous, so make sure you incorporate a limited liability company as a shield if you haven't already done so. And it wouldn't hurt to talk to some lawyers.

- If your gut tells you not to partner up with this guy (and essentially give him your company in the process): don't do it! If it feels bad now, it will only get worse! Look for a real VC and/or possibly a bank deal. Maybe you can set up something with those partners who already operate in this space?

- If you currently have no customers, maybe it's worth considering to hold off on buying these external services until you really need them. This may or may not be applicable to your situation, I don't know. But if the only reason for using these vendors right now is to give realistic demos and to have infrastructure in place just-in-case, it might be worth putting it on hold until you launch for real.

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