Ask HN: Help three founders mediate a dispute

[albriancharlie]

ALFRED, BRIAN, and CHARLIE are three friends who have worked together on and off over the last 8 years.

Alfred and Brian started OLDCO about a year ago (Jan 2009). They had some modest successes but hadn’t hit anything out of the park.

A few months ago (Nov 2009), Charlie, an independent consultant, had a meeting with VC-ONE in which they suggested a business they would be interested in funding. Charlie thought that he, Alfred and Brian would make a pretty awesome team to chase this opportunity, and he got all three friends together with VC-One to make a pitch.

Alfred and Brian put OldCo on hold and the three guys started NEWCO in Jan 2010. They pitched VC-One and got a term sheet. However, during the diligence process, VC-One got cold feet and backed out of the deal. Alfred and Brian went back to OldCo and Charlie went back to consulting.

VC-One had gotten to know Alfred and Brian during this process, and introduced them to VC-TWO, who they thought might be interested in investing in OldCo. They pitched (Feb 2010) and got a term sheet. At this point, VC-One and VC-Two decided they would like to co-invest in OldCo. So they did a joint financing in Mar 2010.

When Alfred and Brian told Charlie about the financing, Charlie was upset.

Charlie believes that he should be compensated for the introduction to VC-One. He feels like the ethical thing to do is receive some cash and stock in OldCo because of his role.

Alfred and Brian are grateful for the introduction, but don’t believe it merits compensation. They feel like people make introductions all the time, and that, among friends, the appropriate rewards is gratitude and karma.

We are Alfred, Brian, and Charlie, and we’re hoping that HN can help us find common ground. We’ve tried to distill the situation to a minimal set of facts; if there are any questions we’ll address them individually in the comments.

If YOU were in charge of the universe, how should Charlie be compensated?

[maxdemarzi]

Cash compensation is out of the question. The start-up needs it/will need it and will create more value out of it than Charlie could.

2% goes to Charlie if he is willing to continue to support his friends as an "advisor" and promises to bury the hatchet.

1% goes to Charlie if he wants no part of it, but promises to bury the hatchet and buys beer.

0% goes to Charlie if he's being a douche bag about the whole thing.

[pg]

I'm guessing from the way this story is told that it was posted by A or B and not C, but if it's exactly as described here it would not be normal to give C anything. The startup world is full of intros and I've never heard of anyone being compensated for one.

[jacquesm → pg]

> The startup world is full of intros and I've never heard of anyone being compensated for one.

No, seriously? You've never heard of brokers that will go from one VC to another trying to find funding for a company they represent based on a success fee?

I don't know or have any affiliation with this company but these guys are working just like that: http://www.intelligentfunding.com/

There are numerous others.

[starkfist → jacquesm]

You've never heard of brokers that will go from one VC to another trying to find funding for a company

That is minor league C-lister stuff that only people who read blogs like ReadWriteWeb get involved with. It's the tech world equivalent of paying to be in a modeling agency.

[jacquesm → starkfist]

Raising funding is hard work, especially if you do not know the circuit and are busy keeping your start-up afloat. To have someone that will take the 'leg work' out of it in return for a small percentage on a no-cure-no-pay basis can be very good.

People like that usually have a reputation to protect, they'll pre-screen the start-ups they represent and they'll do their best to bug their VC network only with those start-ups that they themselves deem worthy of funding.

Y combinator is 'minor league', we're not talking 5 to 15K here, but roughly up to a million or so.

Paying to be in a modeling agency is paying up-front, this is a construction where both parties win if a deal can be made.

There are sleazy variations on this scheme where the broker demands exclusivity or other tactics to gain control of the start-up based on their inexperience but that's definitely not all of them.

[starkfist → jacquesm]

I spent 15 years in Silicon Valley startup scene and respectfully disagree. Anyone advertising themselves as a VC matchmaker for a fee is looking for chumps.

The good VCs have their own people on staff whose job is to go drinking with the cool startup kids. (they are usually classified as an EIR)

[jacquesm → starkfist]

I'm not in the US at all, but in the Netherlands.

edit: Maybe that qualifies all of this as 'minor league C lister stuff' ;)

[starkfist → jacquesm]

I'm afraid I'm ignorant of how the biz works in the rest of the world.

[pg → jacquesm]

I've never heard of a deal that actually happened because of one of them, no.

[jacquesm → pg]

I personally know a guy (formerly very high up in ABN AMRO) who makes a very comfortable living that way.

His fees are either a %age of the money raised or a small %age of stock in the company.

[johnrob → jacquesm]

He probably informs clients of the terms before providing services.

[byoung2 → jacquesm]

You've never heard of brokers that will go from one VC to another trying to find funding for a company

I would think in these cases, the broker should have a signed contract before the deal is made.

[jacquesm → byoung2]

They had a verbal agreement to do this together, after the initial try at getting funding fell through they decided to bypass Charlie and go it alone. I personally think that even if there are no signed contracts they're doing the right thing by looking for a way to compensate 'Charlie' for his contribution, after all without him they might have gotten funding, but not this funding.

[byoung2 → jacquesm]

I read it differently. They had an agreement to get funding for NewCo with VC One. When that fell through, A and B got funding for OldCo with VC Two (and VC One as well). I don't think there was ever an agreement to get funding for OldCo, and C had previously left OldCo to become a contractor. Therefore, C does not have standing to receive compensation from OldCo.

[staunch → pg]

I seem to recall Charles Ferguson (Vermeer/Frontpage) let a guy invest $50k when he raised his Series A, as a reward for his introductions/reference. I think he also gave some equity to his headhunter, in part for the introductions he made.

I suppose neither of those cases were "finder fees" though. Some consideration seems fair though.

[pg → staunch]

If investors do intros it's definitely expected that they'll be allowed to invest in any resulting round if they want. I was assuming C wasn't an investor though.

[byoung2]

C doesn't deserve compensation for the introduction alone. Maybe he could get something if he had some part of OldCo's intellectual property (e.g. he wrote some code, etc.). The "startup world" is still just business. Consider the same situation in another industry:

Imagine A, B, and C were members of a rock band and C goes solo. C later meets with Record Label 1 who is interested in a country trio. A, B, and C reunite as a country trio and pitch their demo to the record label who declines. A and B then return to the rock band, and C goes solo again. Record Label 1, now well-acquainted with A and B, introduces them to Record Label 2, who, along with Record Label 1, signs A and B's rock band. I doubt any band would ever be expected to give up a portion of future royalties to a former member (unless he had rights to songs, recordings, etc.).

[Rust]

If finding VC-One or VC-Two is something that OldCo truly could not have physically accomplished without Charlie's help/introduction, and OldCo was looking for investors, then yes, OldCo does owe Charlie something. By accepting investment, OldCo has accepted this responsibility.

If finding VC-One or VC-Two is something that OldCo could have reasonably expected to accomplish on its own, then Charlie should be thanked for the intro (possibly including a night of beers and wings) but no other monetary compensation is required.

Personally, though, I would be inclined more towards the sharing. It's a friends thing. I would not feel ethically bound to do so though, so if Charlie approached me all pissed off and righteous about it, he can kiss my silk-wrapped butt.

[bgnm2000]

Charlie should get a pat on the back, and feel good he was able to help out his friends.

He should be ashamed for feeling so greedy.

[jacquesm]

Alfred and Brian should make Charlie part of the original deal on the condition that Charlie will pull his weight as originally envisioned. Having one or two investors does not make a difference.

The investment should have been in 'newco', but since that's a done deal and no longer possible you can work out the ratio of shares that Charlie had in 'newco' and how big a chunk of the post-investment old-co that is.

If Charlie prefers to stay outside the whole thing his introduction to the VC should be worth about 1 to 2 % of the amount raised, payable as a consultancy fee from the money actually invested.

[starkfist]

Charlie should get nothing. Such is life.