

Ask HN: Next round of financing - rjett

I own a brick and mortar business I started w 2 friends over a year ago. One partner and I put up equal amts of money to capitalize the business. I run operations and did all the legwork involved to start the business. The partner who put up money w me had limited involvement at the outset and has less involvement at present, since he has a career elsewhere. Partner 3 runs operations w me and was compensated w a small amt of equity.<p>We broke even in yr 1 and are on track to make a profit this year. We've done a great job of branding, PR, and customer service which huge in a brick and mortar business.<p>Recently, an investment group approached us. Investment is an attractive option bc it would allow us to corner the market in our city and expand outside of it at a faster rate. Growing "organically" w/o the help of investment is less attractive bc it is a linear process and the time horizon for expanding is further, running the risk of competition crowding us out of an already crowded market.<p>The group has proposed that they would buy the non-operating partner out of his shares and then capitalize us from there. This partner understands the attractiveness of investment and he also understands the potential stability and opportunity it would give me and my operating partner, but he's also expressed that he didn't invest in us to make a nominal sum of money a year later (even if it is 2-3x what he put in). Question 1, what is an equitable way to handle this situation?<p>Also, I have a realistic number of what our company is worth today, but I fear that if our non-operating partner were given his "fair share" for the company from that number and then we were flooded with the investment that the group is talking about, my other partner and I would be diluted to &#60;5% collectively (barring any additional guarantees). If that were to happen, I would be fearful of losing control of the company. What sort of guarantees should we ask for? Red flags to look for?
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gregcohn
The right way to have handled this would have been to have founder vesting
with your co-founder, so that if he checked out (as he seems to have) leaving
you to do all the work, you would have stopped the clock on his getting
additional stock.

In the absence of that, however, he should still be amenable to a negotiated
price, perhaps leaving some upside in play for him. Similarly, your investor
should be interested in setting up a favorable dynamic whereby you have enough
stock to be incentivized to continue to help the company succeed.

A typical way to do this if the co-founder is unwilling to sell all or part of
his stake outright is for the new investor to dilute everyone, and then "re-
up" the key players (ie you). You will need voting control of the company you
can effect this.

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sharemywin
You should look into franchising. You can leverage the capital of the
franchisee and his management talent. Part of your expansion risk is finding
the right people. You location has done well because you and your partner are
there to work it. As for the investment why not split the buy out with your
partner. ie. You each take half the buyout and keep half the shares. Then
focus on franchising for expansion.

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shail
If you were approached by one investment group, then there must be more who
are interested. If you have more options the you can negotiate a better deal.
I don't think letting the person, who believed in you initially, (even though
with just money) should be just paid off & be forgotten.

