|I'm posting this under a pseudonym in order to protect the naive. I'm involved in a consumer web commerce/entertainment startup. We've spent a significant amount of time refining our prototype and we're just getting ready to start accepting content in anticipation of a public beta launch. We would ultimately expect to burn through a few million dollars to reach profitability, largely bandwidth, but we're bootstrapping as far as we can.|
We've quite randomly encountered a team of would-be startup incubator / money finders / placeholder executives who after meeting somewhat briefly with us and looking over our (slightly informative) business plan and partially functioning demo site, suggested that we re-form as an S Corp in Delaware, which would be preferable to our current LLC in California. They then sent over an offer to pay them $7k (half up-front) for the preparation of an investment kit (incorporation, business plan, stock purchase agreement, etc.), and mentioned a 4% commission on money raised and 4-7% founders' share equity for them with a ~$3M series A open-ended round, and that we would be able to keep majority share for the founders at that valuation.
Now, given the fact that we would apparently be their first clients, this is the point where most sane people would run away screaming. We declined their generous offer for the investment kit preparation as too risky for us given their lack of track record, but they would like to meet for more in-depth discussion and possibly some other kind of arrangement.
It's probably unrealistic for us to think about a series A round before we have content licensed, let alone users and revenue. That said, what do you think about involving people like this in a startup? Are there any red lines that we shouldn't cross here, for fear of making us unattractive to investors? What are some ways of minimizing our risk as we seek partners in raising money? Are there any particular resources you might suggest for us?