
Ask HN: How much is too much? - 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.<p>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.<p>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.<p>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.<p>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?<p>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.<p>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.<p>Advice is welcome and appreciated.  Thanks HN.
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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.

~~~
seaking
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 between our heads and our guts at this
time. From a business perspective, it makes sense to keep the lights on and
see where this thing goes. If we walk away from this deal, we put the company
in serious jeopardy unless we can find an accelerated path to revenue. So the
head says yes, but the gut says no.

~~~
petervandijck
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.

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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.

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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!

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

-Pete

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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.

------
MarinaMartin
Don't give away half of your company for two months of work. Pick up some
consulting work pronto. Sell your car. Try to get up-front payments from
future clients.

Anecdotal stories of people securing funding in one day over lunch are true,
but not the norm. Usually fundraising is a six month full-time process. If
you're on the precipice right now and truly feel (and I think you _have_ to
truly feel it!) that revenue is right around the corner, then stick to that
path for at least a couple of months. You can always get jobs and pursue
funding at that point.

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avibryant
Not enough info here to give much concrete advice, but if it's helpful to talk
to a fellow Canadian who's been through all of this, feel free to ping me
privately with more details (avi@twitter.com).

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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.

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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.

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

~~~
timelinex
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.

~~~
aaronblohowiak
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.

~~~
trizk
The only problem with this strategy is that 30% may leave you with nothing as
the majority owner drives the company into the ground or fires you prior to
vesting. You would be in a worse situation than 0 because you would have
invested your time and energy. As entrepreneurs, we all know how demanding a
start-up is. To be swindled is just not an acceptable result of effort.

Edit: spelling

~~~
aaronblohowiak
Right, i wouldnt give up control until i exited. i assumed two founders
bringing in an investor who would take 1/3, so the two colluding founders
would still have control.

~~~
trizk
I think the op mentioned that the investor wants a majority stake. Otherwise,
I agree assuming that you know your co-founder well enough that s/he dose not
collude with the investor to oust you.

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gyardley
Sounds like a bad deal to me (and the directorship would be a non-starter) -
but I don't know what you're building. You need to figure out fast whether
this investor's valuation is disappointing but accurate, or just artificially
low. The only way to do that is to take it to the market.

First, send me an e-mail (see my profile). One of my own angel investors is
Canadian and so is most of his portfolio. I'll happily make an introduction.

Second, AngelList (angel.co). A great way to get in front of a whole lot of
angels at once. AngelList also has a decent number of Canadian participants -
listed at angel.co/canada. If AngelList itself doesn't work for you, you can
always get in touch with them individually.

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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?

~~~
seaking
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.

~~~
Udo
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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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.

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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.

------
patrickgzill
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.

~~~
seaking
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 him, and he wants to take the time to bring himself
up to speed before taking a more active role in the company.

One of the reasons we're feeling trepidatious is that we haven't spoken to the
man since August, save two email. The rest of our interactions have been with
his lawyer, who, while civil, has been a bit onerous to work with.

We're just not sure if this is an indication of how our relationship will work
going forward, or if this is merely a difficult courtship period that could
result in a truly beneficial working relationship down the road.

~~~
lancewiggs
It sounds like you already know the answer.

My 2 cents is to back yourselves for another month or two, keeping it lean.
Use the time to improve the viability of the business, but also to shop for
other offers. A bit of competition will increase that valuation and let you
assess the quality of advice and commitment you'll get.

Alternatively sell him 15% of the company at the valuation he is offering now,
and use that money to keep going until the next round at a higher valuation
based on more mature business results.

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petervandijck
Shop around. You have an offer from someone (that you probably shouldn't take
though.) Now go talk to others.

