Question
Hey entrepreneurs,
I have a question regarding a seed investment round and would like to hear your opinion.
I am the owner of a design/development agency and 1,5 years ago I cofounded a startup with two friends. The deal was, that my company designs, develops and maintains a webplatform for a fixes time horizon (1,5 years), while the other guys are working on the business side and that I take a 23,5% share in the company for that. Myself took the role of a product-manager on an almost-fulltime basis and was also involved in every strategic decision.
The product is already live for more then a year and has a lot of traction as well as revenues.
According to the agreement, I (and my company) want to quit now and minimize my commitment completely, while maintaing the 23,5% stake in the company.
On the other hand, after having bootstrapped for 1,5 years, my cofounders want to raise a seed round now. However, they say that it will be impossible (or difficult) for them to find an investor if I (or my company) have a 23,5% share in their company without being a (committed) team member in the future.
They claim, that a too large stake is "dead equity", which is not contributing anything to the company. Every investor will now refrain from investing in the company.
I claim, that my role in the beginning was more the one of an " angel investor". Instead of investing money I agreed to bring in a service with the value of XXXXX€ as we have built the product for free and only took a share for that.
What is your opinion about that?
Is it true that we took a too large share in the company early-on and that every seed investor will now refrain from investing in the company because 23,5% is in the hand of an investor (my company) without contributing future money/value?
With that logic no company should get a business-angel on board early on because it will deny every future seed round.
Could some guys with experience in Venture Capital give their view on that topic?
If any further details are from interest, feel free to ask me.
All the best
Jack
Answer
Mark is wrong. I personally know of a handful of companies in that exact same situation and most importantly that have good traction and the cap table NEVER came up once, and each of these companies have raised in excess of $1m in seed funding from great investors this year.
Especially if your shares are common shares and/or have no particular unique traits about a share class, and especially if you can document the time and resources your firm expended to build and maintain the service that now has traction, this will not be a problem.
Investors give many excuses when they don't want to do a deal but those excuses are rarely the reason for not pulling the trigger.
The issue is more likely to be that there are two business folks running a company without a technical founder, which is almost always a deal-killer but that has nothing to do with your equity share.
Happy to talk to you in a call if you'd like.
