I'm the founder of my current startup. The new startup is an opportunity to leverage my industry expertise twice. I would get shares in the new startup, but not have control.
Obviously the idea would be to create a close partnership between both startups (they are quite complementary).
I'm afraid of two things:
1/ This new startup may become a direct competitor one day. The industry is very big, with the largest player having only about 5% of the market. Still, our two startups are two of the very few players with an innovative concept in the industry.
2/ The insights that I transfer to the new startup, may spill over to the rest of the industry more easily (as I have little control), reducing our competitive advantage.
How could I craft this partnership so that my two fears can never materialize?
I am not a lawyer and am not giving you professional advice here. Merely discussing the topic.
I see what they are getting from you...but what are you getting from them?
You lose control...they get your expertise...you can be booted out at any time thereafter.
I don't see the upside.
If they want your expertise, they can pay you for it: hire you, license your product, etc.
If they don't want to work with you as a separate entity, that should tell you a lot about their true intentions and how badly they truly need you (or don't).
I personally would not get involved in an offer like the one you've described. You can still be friendly, offer to work together, be complimentary as you say, but I don't see any reason for you to give up control for a few shares in someone else's company, transfer your knowledge, and then be at risk of being kicked out because they don't need you any more. Plus, do you really want to be a minority shareholder and treated like an employee, rather than the owner?
I suppose you could have a legal agreement drafted but secrecy never lasts and your insights WILL be leaked sooner or later. I also doubt your position in the firm can be protected. Speak to an attorney as I am not an attorney.
Once you have your strategy figured out, make sure you speak with a lawyer to protect you. I am not a lawyer but will give you some advice that has guided me in the past.
Firstly, It really depends on what you want and what you want to do. First you need to look at your current marketshare versus them and also what you project your future marketshare versus them will be. If you have about equal (or greater) marketshare then getting a minority share is not reasonable and you should negotiate for a fair share. If you have less marketshare than them, and you feel you might be losing traction, then you may want to take a deal with them, working with a lawyer to protect your interests and stake. I'm sure the lawyers will go over this, but you need to ask about anti-dilution clauses, employee termination (fight for termination only via just cause), board seat and/or visitation rights and share with minimal (or no) vesting period.
I would also base the decision on your personal familiarity of developing a business. If you believe you have and can get all the pieces to grow and build the business then I probably wouldn't take the deal, however if you are lacking talent aspects of your business, such as sales and business development, they may be able to provide it for you, or alternatively you can try and recruit a full time biz dev expert.
Also, in my personal experience, at this level litigation is far too costly and you should due your diligence on the company. How do they treat/handle their employees? How do they handle clients and vendors? Do you get a bad feeling that they will try and take advantage of you? Would you get along with them on a day to day? Do you feel that their company will grow yours or that it will be an anchor to you?
One more thing to consider, is the education from the exposure of being in relation with the firm. For instance, I made zero money from the equity from my startup but the education that I received being around business developers, angel networks, VCs and experts in various industries, as well as the contacts was well worth it. It can be like an PhD in entrepreneurship and that can be worth it.
Would love to know more about your specific situation and give some more industry specific advice if you like!
Have a great day and good luck.
1. If they are providing you a significant portion of equity and salary. Look at it as an acqui-hire.
2. If you have revenue and are growing then perhaps your evaluate the opportunity differently ask have them buy your company out.
3. If you want to stay on your own then stick to it. Don't worry about the competition it just motivates you to stay ahead of them.
4. If you really want to work with them and have your own company. Create a JV (joint venture) you have a lawyer work through this to iron out all the details.
If you want to talk just give me a shout.