

Startup company stake - Please advise... - Spike

Hi everyone,<p>I need your advice on starting a company with two other partners, and my question really is about equity levels. Here's the story so far...All three of us have been working for a university  and for various reasons we all have decided to move away from the academic world and go in industry. One of the partners (let's call him X) has good links with industry in China and he managed to bring money over to start a project, which is the design and development of a point-of-care device. The contract terms between the university and the funding company made clear that any IP arising from this work will belong to the company, with us three being the named inventors in the patents generated.<p>They were happy with the outcome and through X's prior links with company (X is a board member in the company) it was agreed to form a new company. They agreed to invest around £300k in return for about 40% stake in the new company. The remaining 60% would be divided as follows: 20% for X (he claims he had bought in the past seven patents from his previous company which went into liquidation, investing £120k - later he said it was actually £150k), 20-25% for options for other paeople that will eventually join the company at a later stage) and the remaining 15-20% for myself and the third partner.<p>At this point I need to point out that myself and the third partner are making things happening (in terms of engineering) and without us it would impossible (or at least it would take a lot of time for him to build a new team) to start the company now. Also, it is important to note that X has no other option but to leave university, as his contract is due for re-evaluation in September, with negative predictions for the outcome.<p>Some more info about the forecast of the new company: we will be using the manufacturing facilities of the funding company and we will have direct access to their sales network, They say the market is already there, they have clients and last year they had a turnover of more than $10m (it might be more, i can't remember accurately). My salary will be slightly less than the market value (probably around £35k/yr) and I suspect X will be asking for a lot more, as he takes for granted that he will be the technical director and acting CEO of the company.<p>There are many details that we're not told of, because X is taking the excuse that his contact in he funding company does not speak English fluently, that's why all their conversations are in Chinese. We get the occasional email in English circulated among all of us, but nothing mentioning stake levels. I feel I'm heading straight towards a not-so-good deal, while I know for a fact that X will not go below 20% as he immediately points his finger towards his £150k investment in previous patents, while making claims of the type "I have achieved with great efforts your involvement in the new company as co-founders with a stake, rather than just employees". I have started to grow tired of his bull and I'm trying to figure out how I can go about sealing a good deal for me. I have previously discussed with him the matter of equity, as one day he came to us and said "when the time comes to decide equity, you must be modest" and at that point I told him that modesty has no place in business, I will only be fair and I won't settle for anything less than fair, I will literally walk away if I'm not happy with what's offered to me.<p>I have the feeling that this is the ONLY time I can bargain with him, or them (the funding company), as this is the only time I feel that if i break the team, he won't be able to go ahead, at least not according to his time plans. I'm fighting with myself, as one side of me wants to grasp this opportunity of potentially making enough for the rest of my life, while my other side is telling me that X is trying to manipulate the whole situation based on the trust he has with the funding company, and that without him they wouldn't invest, which is probably true. Still, I can't trust him, at all.<p>Apologies for the long story, I just needed to draw, with as much detail as possible,the whole picture. I would appreciate any thoughts you might have, I desperately need some advice from people who understand business. I'm very good at what I'm doing but when it comes to business, it's all chinese to me....<p>Thank you in advance.<p>S.
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jacquesm
run while you can. Seriously, if you are at this level of trust between
partners then nothing good can come of it, 35k / year is laughable for a
company with that kind of turnover.

Having your name on a patent is not synonymous with value, stock is, if you
have no stock then you have nothing.

I know this does not sound too positive but I've been in that exact boat
myself one day long ago and I stayed in longer than I should have hoping
things would get better. They didn't.

best of luck,

Jacques

~~~
cperciva
_run while you can. Seriously, if you are at this level of trust between
partners then nothing good can come of it_

Absolutely. Mr. X may try to tell you that he's doing everything he can to
create a great opportunity for you... but all I see here is an opportunity for
him to make a lot of money out of the work you're doing, while giving you a
lot of headaches in the process.

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Spike
Hi Jacques,

Thank you for your reply. I do agree with you, without trust things can only
go wrong, as he is most likely going to align with the company, I can't do
anything about that really. What I think it might be a good deal would be to
split the 60% to something like 20% for him, 15% for me, 15% for the other guy
and the remaing 10% as options, which to me sounds reasonable. Even so, what
other dangers are there? Can they kick us out after a while, since they will
have the majority of the company stocks? I mean in the sense that after a year
or so they say they're not happy with our performance in the company, the
current company value is, say £1m, take your £150k for your 15% and go home.
Could they do that?

Also, do you think it is reasonable to demand equal salaries for the three of
us, as he claims "we're going to be equal, nothing like he's the boss and we
the employees"?

Another thing he said and I forgot to mention, was that when I said to him
that I will be fair but not modest, he said that he knows a guy from his
previous company (which surprise-surprise has the same specialty as me) that
desperately wants to join the company, but he's giving priority to us, because
of our loyalty over the years working with him. What a manipulation that is,
isn't it?

~~~
jacquesm
in a startup trust is everything. If you don't have that trust with the other
founders you - and they - will spend a lot of time and energy to avoid being
backstabbed, This will destroy the atmosphere and in the long term will cause
trouble.

Then the stock will speak, 51% takes it all.

Unless you have a very good lawyer who is willing to ride along with you in
order to make an iron-clad deal (and this is harder than it seems) you are in
for a world of trouble and lost energy.

I'm sorry I can't make it more positive, again it may be my perspective but in
any business that I'm involved or have been involved in if the trust factor
isn't there then count me out.

Technically speaking it is probably possible to do business without trust
using an army of lawyers but if the compensation isn't worth it then I can't
see how you could afford the lawyers. You need compensation somehow, either in
good feelings towards the product, team members and your work or financially.
If all you get is promises and maybes and your feeling is already as bad as
you describe then don't bother, use your talent and energy to do something
fresh in stead of burning yourself out on the wrong project.

Disentangling yourself from this a few years down the road will cost you more
than it is worth.

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trevelyan
As someone with considerable working experience in China and fluency in
mandarin, I can tell you that "good links with industry in China" mean
absolutely nothing if you have cash. And you don't need a lot of cash.

The immediate question is why this guy wants you doing engineering work in the
first place? I wouldn't. You can't even communicate with your most important
business partners or with the manufacturers. Why not hire some great Chinese
engineers for a lower salary and avoid issuing stock anyway? I don't mean this
to come across as offensive - I'm sure you're very talented - but it is a very
practical problem.

Suggests to me that your university is being hooked into a snake oil project
to add prestige to the proposal and make it easier to hook Chinese investors.
You guys will make your salary and the rest of the cash will be gone in a
year. If the market for this product is so enormous and you're capable of
doing the engineering work and no-one else is, why not simply make it yourself
and outsource production? Offer this guy a percent of profits or ownership
stake based on his ability to meet sales milestones.

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Spike
Thank you all for your comments, very much appreciated. It is a bit worrying
that I get pretty much the same advice from everyone. I will get a lawyer asap
and discuss with him as well. I think that part of his mind game is to deter
me from getting excited with the whole business idea, and drive me towards
signing off my rights (and hence my stake) and withdrawing from the whole
deal, by building a tense climate during these early phases.

I can't see which one of the two routes I will follow will describe me as
"self-destructive", withdrawing from the whole deal and find peace (and hence
losing any financial benefits from it) or stay and fight for my financial
rights in this company, in return for an anticipated period of struggle and
stress, which is part of all startup businesses - or almost all of them, I
don't think I will give up easily, I'm still holding a card in my hands, and
that is there are no specific deliverables in my current contract. If the
worst comes, I will just not deliver unless they become reasonable. What do
you all think?

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gsk
A few months ago, I was in a similar situation. See
<http://news.ycombinator.com/item?id=502641>

Once I started insisting on a fair stake things didn't work out and I walked
away finally. I don't regret it (building a different product now, will take
it market without the named partner).

