My cofounders want to establish a subsidiary company to spin off a new service. The only reason for doing that is to satisfy existing investors because we used their money to build the new service. I want more opinion about this issue... Personally, I don't think that is a good idea because the subsidiary will be controlled by the parent company (to let investors to have a cut of it) which might affect followings;
1. No investor is willing to invest that kinda subsidiary company especially the parent company is only Pre-A without a clear growth.
2. Early employees might have less motivation for this subsidiary startup. (because it loses part of the fun part of being a startup: doing the way you want)
We should either stay at the same startup or spin off an independent startup but not to make a subsidiary. Existing investors can still have better term to invest in the new startup. Anyway, I am trying to let members know this isn't a good idea but it seems the knowledge I have isn't enough for them...
Any suggestions?
Thanks!
1. Is the new business model better from a business standpoint than the current idea?
If yes, forget about a subsidiary and pivot all resources to the new business model. How that is done depends on the second issue:
2. Are the investors suitable for the new business model? [where "suitable" means willing to maintain their investment following a pivot.]
If no, then folding the existing company and starting a new company is an option worth considering. Such a case illustrates what YC means by "investing in people rather than ideas".
On the other hand, if the answer to the first question is no, then the idea of a subsidiary has a high probability of forming a distraction for a resource constrained company.
Finally;
A. Adding a subsidiary just complicates the legal structure of the company and therefore is likely to discourage investors.
B. A company can have two or more products without forming a new legal entity.
Good luck.