Ask HN: How to structure the funding for my company?
It seems to me that the coolest way to structure an investment is like this: come in with an amount of $ that you will need in order to be sure you can take the company to the next level, and then negotiate how much % you are willing to give away. Let's say it's $200,000 for 20% of the company. Then take the deal with the investors you think are the best fit, but structure it as follows:
The $200,000 is set aside for being used if your company needs it. That way everyone ensures the company won't fail for lack of money. But you withdraw the money in $10,000 increments. Each time you withdraw, you sign a note and that is when the investors get the corresponding % in your company. If you wind up using $40,000 and launch something that makes your company way more valuable, you can start shopping around for a much bigger valuation. Let's say by the time you have spent $50,000, you have found investors interested in doing a round at a 10 million dollar valuation. Then your first investors at this point own 5% stake in your company, but that 5% just became 10x more valuable (as did your shares as a founder). Now you do the same thing at the second round of funding, etc.
This way, it's a fair deal for everyone involved and the incentives properly align with what's good for the company. The entrepreneur will not want to just waste the money they are given, and in fact will actively try to grow the company's value. This seems like a good deal for the investors, too. In fact, if I was investing $200,000 into a company, this is exactly how I'd want to structure it -- I'd start to feel uneasy if the company started spending the last of the $200,000 without another deal in place yet at a much higher valuation. Giving the entrepreneur the incentive to constantly grow the value of the company (and as a result, give away less equity) seems to promote runaway hits, which is what VCs try to fund all the time.
Investors in previous rounds would be invited to participate in later rounds. But there won't be any "back-room deals": once someone is willing to invest in your company at a 10mil valuation, someone cant go "just give us another 2% at the old valuation".
What do you think? If there are any seasoned investors reading this, could you please give me a piece of your wisdom? I'm just speaking out of intuition here.