Comment by bobbysax | Hacker News Reader

Comment by bobbysax | Hacker News Reader

Thanks a lot everyone for an amazingly prompt response. I did leave some important details.

The CEO is a serial entrepreneur - he has sold 2 companies to Autodesk and 1 to IBM in the past. He has enabled investors to realize exit profits in the US$180 million range with his founding team member involvement. He is also a highly rated and a well renowned speaker - this is how he gets business. Also, yes - they have been consulting so far but along the way, they have several prototypes developed (to be evolved to full products dependent on funding). I guess thats where the valuation comes in.

Someone1234: I like your idea of not putting all eggs in one basket. I think he did PMV at worthworm.com. Also, the fact that someone is willing to invest $2M - 10 multiple of the seed amount is $20M. Is this how you typically validate the PMV? And yes, one of my incentives to invest is to get myself paid. Is that a good approach?

kkowalczyk : I agree consulting companies cannot scale that much. But, this is positioned to become a product company (dependent on $2M funding) - in that case, what are your thoughts?

Jeffmould: The CEO has confirmed I will be at the top of the stack. Future funding will not dilute my equity. I like your idea of convertible debt to safeguard my investment. In fact, the CEO did mention this to me - he will take this investment as a loan to be returned to me - maybe he meant convertible debt? Is there anything more I should watchout for?

auganov: Thanks for your honest answer. I don't blame you as I left out the relevant details earlier. But how can I ask for 15% for only $100K when Mr. $2M is asking only for 10%?

lxfontes: Yes, if the $2M seed comes through, they have offered me a full time employment with some common stock but without the founder shares. Founder shares will only be given with cash investment.

Thinking about this even more, the company is only cash flow positive because they are not paying you. And if they are not paying you, the question begs who else are they not paying.

Just because the CEO has sold multiple companies and realized profits for previous investors, does not automatically make this a golden egg as well.

Finally, just because the CEO says you are at the top of the stack and future funding will not dilute you, does not mean it will not happen. In fact it is fairly certain to happen if additional, bigger investors come on board. If you want to get an idea of the dilution, Google an Excel cap table example (there's actually a pretty good one on http://cooleygo.com) and play with the numbers a bit.

I would honestly skip the whole deal, push for either them to pay you what you are owed to date or go with a convertible note. I would also talk to an attorney before I made any decision. It just seems to me that the CEO is trying to make it sound like a great deal with no risk, when in essence the risk is enormous.

If the CEO is such a big success, where the fuck's his Ferrari?

And if he has a Ferrari, where the fuck are your consulting fees?

My understanding is that you're going to join as a full time [somewhat critical] employee? Take a stroll around angel.co jobs. 2-3% for an employee is pretty common at small startups that already have funding. Even 5% at times. And that is for engineers.

The 2M is not there yet. It would only make sense if they agree that your investment only goes through if the 2M does. VCs love doing that. If they agree, then yes, I wouldn't consider the 3% a super unfair deal. But you still need to ask for employee equity @3%-10% depending on how critical to them you'd be. And I'm not even considering the money they owe you. Without the 2M guarantee I'd multiply everything by 1.5-2.

But still, I wouldn't do that deal, just no.

EDIT: just read the part about the CEO having a good track record. If that person is fully dedicated, you have trust in them and can verify their past then yea, the mainstream "market rules" don't really apply anymore. But still - negotiate. Or run :D

I don't feel competent to contribute here essentially to the discussion, but one thing I noticed in the past is, that people often create consulting companies as "placeholder" spots. Meaning they are good at creating "real" businesses and when there is no high profile project for them to work on, consulting is a way that makes them feel busy. Not sure if the CEO is that kind of a person, but I would consider that option especially because of the "serial entrepreneur" background.

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