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
What I am hearing (and how I feel) is that the question as asked can be interpreted differently. Lets try to answer each interpretation.
1) Will it prevent the company from moving forward?
It is unlikely to be the cause of the companies demise and more likely the company's own shortcomings would cause the issues. That said, your ability to pivot is sometimes more limited with more substantial shareholders.
2) Will it affect me?
This it may. You could end up with less control than you would think and your co-founders and investor could push you aside.
3) Is it too much?
This is the true question you are asking. This also depends. Why 23.5% and what are you getting for this. This is the overall issue here. So if you are giving too much away, why are you doing this. In essence, if I give away 50% of my company in return for the first 25M in revenue, I won't get faulted for this as it is a lot of revenue. You need to balance growth at this moment with monetary needs to ensure that you don't end up giving away a lot now only to end up with several cram down rounds around the corner.
So, if it is about the company, it won't be a big problem (unless the investor is difficult or has too much control), if it is about you, it may be a problem, and if you are asking, then are you already feeling like it is too much to give away.
