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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.

> 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.

I more or less agree and voted you up, but if the guy's asking for 1/3rd of the company at $750k, does that mean he's putting in $250k cash? That might be the lesser of two evils here. Can't really say without more detail, but sometimes you've got to bite the bullet and choose between a few different bad courses of action.

What I'm curious about is if the company has made any revenue yet. Your first revenue is always further away, and smaller, than your projections.

Edit: I just read the part below about not hearing from him since August... probably not someone you'd want directly involved in your team or decisionmaking.

No revenue yet. Our first campaign launched yesterday, and one of our sites is seeing the first hits trickle in now.

> it is super obvious you are not comfortable with this guy and don't trust him

If you don't trust someone, then regardless of how the numbers add up, it's almost certainly a bad idea to have him as a business partner.

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.

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.

[off topic]This raises an interesting question, whether gut and head should agree when conducting business?

If the company is worth 750k and he's putting in 250k he should only get a quarter of it, since it will then be worth 1m.

yes depends if the valuation is pre or post his money, Jabbles was not explicit.

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.

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!

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

-Pete

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.

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.

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).

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.

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.

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

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.

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.

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

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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.

In business relationships as in personal relationships, the courtship period is where people take the greatest pains to be on their best behavior.

Thus far, the potential investor has shown himself to be uninterested in direct interactions that would let you get more comfortable with each other, and nothing in his behavior provides reason to expect he'll suddenly become helpful and acquire a deep understanding of your business once he's your partner.

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

Ask HN: How much is too much?