Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 2 down vote favorite
3

My company is in the process of raising additional capital for my semi start up website. Currently we are in a beta testing phase with the intent of testing the functionality of the site on a larger scale. At the moment we have a few hundred registered users but have not gained a tremendous amount of traction to this point which has been done on purpose.

We have met with a couple of investors to date but considering the stage we are currently in as a start up, they are wanting a bit too much equity than we are comfortable giving up. However, I am of the addage that its better to have a little bit of something then a lot of nothing! I have explored and understand the convertible debt to equity concept and of course there is just a straight equity swap, but I am looking for other ways to limit founder dilution in case additional equity might be needed moving forward.

I have heard of deals being structured in ways that allow the "founders" the ability to give up a little more equity in the short term with the long term goal of buying it back. Essentially ways to structure deals that in the long run cause minimal dilution. Obviously I realize that if I want the money I am going to need to part with equity on some level but if anyone has any additional suggestions I would really appreciate it!

Thanks in advance for all of your time and consideration!

-Robert J. Dolle

share|improve this question
What you describe, a way to sell equity but later get it back again -- I haven't heard of that, and find it hard to believe that it exists. Given that, it's not clear to me what your question is... :-) – Jesper Mortensen♦ Dec 23 '10 at 19:19
I spoke with a gentleman who has a successful company who said that he brought on investors in the beginning and was diluted down to 35% ownership. He did not go into too much detail but stated that he bought back a majority of the shares he had sold and now holds 70% ownership. Obviously he repurchased those shares at a premium I am sure but other than the investors willing to sell them back, is there any other way to structure a deal so that this is an option? – Robert Dolle Dec 23 '10 at 22:30

1 Answer

up vote 4 down vote accepted

A common way to do this would be to have the angel investors loan money to the company, with an option of converting that loan to shares if there is a follow-on larger investment. This allows the angels to invest without having to agree on a valuation until you have a lot more traction.

For example, the angel/seed investor might put in $100,000. When the Series A closes, the angel investor will have the right to convert their $100,000 into preferred shares at, say, a 10% discount. So for example if the Series A prices shares at $1, the angel investor will find himself owning 111,111 shares. Say the Series A valuation is $2,000,000 premoney - now the angel owns 111,111/2,000,000, or 5.56% of the company.

A bit of general advice. If you think the seed investor is taking too high a percentage of ownership, either you're wrong, or the investor is wrong, but in either case, you shouldn't be doing a deal :-) Some investors try to take huge stakes in exchange for very small amounts of money. This is almost always a really bad idea, even for the investor, because the founders are left without enough skin in the game to really care. That's why typical Angel deals these days are all just pricing at $2m - $4m pre. It's not like two Y-combinator guys with an idea are really worth $2m. It's that they really need $500,000 to get to the next level, and taking any more than 25% at this early stage will not leave enough equity to get the company to the finish line, so you just have to assume a $2m valuation or go home. Angel investors who don't understand that and try to take too much equity are setting up their companies for failure.

share|improve this answer
Thank you for your response Joel. It was very helpful and confirmed that I am not out of my mind! We had figured to be pricing in the range you mentioned but your reply has confirmed our stance. At this point it comes down to who believes in the idea and believes in the team we have put in place to get it done. – Robert Dolle Dec 24 '10 at 2:04

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.