After speaking on a panel to a group of entrepreneurs recently, I had a classic follow-up exchange with an entrepreneur trying to get a company off the ground. I thought the exchange was worth sharing:
He wrote: “Thanks for your talk today – it was very helpful. Here are the details of my question. We’ve raised $15,000 of seed funding from two private investors, in exchange for 0.6% of our company’s equity (which equates to a $2.5M valuation). In order to have an enterprise-ready product, we will need $62,000 more. We were just recently approached by [XYZ] Ventures and they would typically invest $250,000 to $1 million. We will discuss terms next week, but I know that VCs are typically expensive money and that I could lose a quarter of my company from such a round. Our thoughts are to approach some angels to get the remaining capital, but I would like to set a strong valuation for my company that would prevent us from losing too much of the company at such an early stage. Do you think a $250,000 investment for 10% equity is a realistic goal? What should I look out for in our meeting? Is it fair to assume that my seed funding terms will set the valuation for the company moving forward?
“I am bringing on an excellent developer who’s charging $130 per hour for his services. We’re a three person startup and we could really use the extra talent, but our cash position won’t be able to support him for a full project. I want to figure out a good way to incentivize him to play a greater role. Only problem is that he has a wife and two kids. The two of us were connected through a mutual friend and he has extensive experience in the software industry (14+ years). We would be prepared to give him 5% of equity, but how else can I structure our business relationship to hold his interest in the company?
“I have already decided to quit my job to pursue this company full time and we have had some great wins. One of our founders is preparing to leave his job in a month, while the other is only starting his job. To be fair, the latter hasn’t been in the job force for very long and wants a decent savings to live off of. He maintains that we will be able to meet our current development goals, but I have heard him mention that he would only go full-time if we were able to raise 120K, or if we were accepted to Y-Combinator. He is an excellent resource to our team, but it seems that he may not ready to be a ‘founder’. I have considered taking away some of his equity stake, but I fear he would only retaliate by performing less work. We currently have a vesting schedule in place, but I want a better way to clearly define his commitment (not just on a completion of the project) so that we can prepare our next steps. How can I encourage more commitment from him or create a vesting structure that incentivizes him to work more?”
To which I responded:
“Thanks for your note. Here’s a few quick thoughts:
Comments, questions or reactions to this post? Leave a note below and I will respond to your questions.
If you enjoyed this, you might enjoy: What I Look For In An Entrepreneur, Why Angels Chase Electrons, Are Entrepreneurs Wild Risk-Takers?, Pick Your Founder/Co-Investors Carefully & Reflections on the Nature of Entrepreneurs, Top 20 Dos & Don’ts with Angel Groups & Early Stage Financing, Delusional Economics, The Overture, That Vision Thing, The Power of An Advisory Board, Loch Ness, Unicorns & The First-Mover Advantage, Should I Wait For A Technical Co-Founder.
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