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Ask HN: How much is too much?

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Ask HN: How much is too much?

#1

Post by seaking »

I'm a cofounder in a small Canadian-based startup. We think we're on to something big, but we're pretty much out of cash and need a couple more months to get to revenue.

As luck would have it, we have been approached by an angel investor who's willing to give us the injection we need, but at no small cost. Since this is an anonymous disclosure, I'll just open up and give some numbers.

The investor is successfully running his own large company and has no burning need to see a monetary return on his investment. He's openly stated that he is more interested in vicariously living the startup life through us, and is also excited about exploring a new space from the same level as the founders. He runs a large company and pines for the days of a young, scrappy, agile startup.

To that end, he has asked for an equal stake in the company and a directorship. The valuation on the table is quite low ($750k) and our lawyers have expressed their opinions that the money proffered is insufficient considering the equity and role he would get in return.

The founders are now faced with a difficult choice. Do we accept the investment and bring on a new partner so we can carry on with our current burn, or do we roll the dice and tighten our belts even further, try to survive two more months, and hope that revenue is right around the corner, or that we find a more suitable investor for our company?

The latter (finding a new investor) would be a more realistic pursuit if it weren't for the fact that December is probably the worst time of year to go shopping for money. If we belt-tighten and buy a flat of ramen noodles, we'll buy ourselves a month, two at best.

No one said startups would be easy, but as this is my first one, I feel that I have no frame of reference for "what is fair" in a situation like this.

Advice is welcome and appreciated. Thanks HN.

Re: Ask HN: How much is too much?

#2

Post by LeBlanc »

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. If you want inspiration, watch Brian Chesky's talk at Start-up School. AirBnB went through exactly what you are going through, and in the end it worked out for them.

http://www.justin.tv/startupschool/b/272180383

Good luck!

Re: Ask HN: How much is too much?

#3

Post by space-monkey »

If you're just burning living expense, you could find some short term part-time consulting work. This would slow you down a bit, but if you believe you'll be either cash-flow positive or able to get a much higher valuation after another couple of months of work, it may be worth it.

Also, would you hire this guy to be your first employee? Would you have founded the company with him in the first place? He's basically asking to be in at that level, so if he's not the right person, there's more to be worried about than the valuation.

Re: Ask HN: How much is too much?

#4

Post by biot »

Is the $750K for the equal stake the result of negotiations and that is the final offer? If it isn't, what's stopping you from making a counter-offer at terms you deem suitable? Since you appear to be able to survive at ramen level, $750K sounds like more than you need so you could try accepting a lesser amount while giving up less of a stake.

Also, one thing to consider is that with that amount of cash, you have a bird in the hand. Holding out for the two in the bush (revenue just around the corner) may not be the best bet. What if you're six months away from revenue? 9 months?

It's your first startup and $750K is pretty good validation that someone thinks your idea is worthwhile. If things really take off, your valuation will go up and the equity you do have will be worth more -- see the Khan Academy Venture Capital video series.

Re: Ask HN: How much is too much?

#5

Post by mbyrne »

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 months? If the valuation is 750K and he is getting 1/3 the company, is he giving you 250k cash? are you burning 125k per month? what is your monthly nut personal and company?

Anyway, it is super obvious you are not comfortable with this guy and don't trust him, but you are thinking of making him an equal partner? Big Mistake.

Re: Ask HN: How much is too much?

#8

Post by sph »

I remember an MIT (Sloan business school) professor giving a presentation and warning the attendees not to take money from those who were giving you just enough to fail. It sounds like you're in a hard place and, as such, the investor is going to get more than the money is probably worth. It also sounds like you've already come to the conclusion that this isn't a great deal.

It's a little hard to judge. Are you on to something big like Twitter or Groupon where you'll be a commonly-known-name or more on to something big like many startups that produce nice products, but aren't going to change the world. For example, Tarsnap is one of my favorite things, but it won't become a household name. Likewise, how close are you to having a product that you could show off, having users, etc? If you're closer to launching, you might be able to launch or private beta Gmail style and get better terms from potential investors who see a product.

The impression I get is that you've already put a lot of work into this and you're coming up just a tad short. You're negotiating from a place of necessity and that isn't a good place to be.

The investor doesn't sound like a friend-type, but rather someone looking to control. If you aren't ready now, will you be ready when that investors investment runs out? Maybe you're 75% there and will be 95% there when the investment runs out? Just in time for the investor to swoop in and take the company from you when you need more money? I'm not saying this will be the case, but if you're going to be giving up that much, you should be absolutely sure that you can launch within the time the investment will give you.

Re: Ask HN: How much is too much?

#9

Post by johnrob »

Do you like the investor? Would you want him to be involved even if you didn't need the money? If so, do your best negotiating and take the money. If not, either do consulting work or get jobs and work nights and weekends.

Giving significant equity to someone you don't want to work with will most likely ruin the company.

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