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All of the current investors in the startup are also employees, and we're investing equal amounts of money into the company. What is the best vehicle for this type of investment, where ownership in the company does not change as a result?

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5 Answers

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You could all invest in a simple note (loan) or consider investing in a note that converts into equity in the next round of equity that the company raises. Typically, these notes pay a reasonable rate of interest and convert at a 20% discount to the price of the next round. Presumably you are all investing in the company because you believe in its future and want to expose yourselves to the upside so the convertible note may be a better instrument.

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up vote 4 down vote

Here's a summary of some possibilities:

  1. Loans (user6492's suggestion). This won't change your % equity ownership in the company, and is very simple from a documentation perspective. So you could all loan the company $5,000 each, but keep your respective equity positions. Only thing to consider here is whether you really want to be taking cash out of the company in the form of interest payments.

  2. Capital contributions. Again, this doesn't change % equity ownership, and is basically a way to inject capital directly into the company. This is not an "investment," but rather a way to make sure your company has some cash. Based on your question, it sort of sounds like you're in this position, i.e. "where ownership in the company does not change as a result?" Unlike a loan, no interest is paid on a capital contribution.

  3. Convertibles or Pref Shares. These are straight up investment vehicles, and will change your equity positions. Convertibles are a bit more complicated than a loan, and work just like "Zippy" explained. There's a big debate over whether convertibles or pref shares are better. Neither is really "better," it all really depends on your situation. For example, here's a link: http://www.quora.com/Andreessen-Horowitz/Has-Andreessen-Horowitz-successfully-used-the-Series-Seed-documents-created-by-Ted-Wang-for-its-investments to a Quora thread to hear the argument for prefs.

  4. Combination of cash and sweat equity. If you're looking to have ownership interests that do not correspond to the amount of cash you're investing, you can account for the differences in ownership through sweat equity or IP contributions. Though this is commonly done at the initial equity split.

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up vote 0 down vote

Sounds like you have a legal entity in place (an s-corp, llc, c-corp, in the US for example).

Assuming everyone owns the equal amount of common shares and everyone will invest the equal amount, issue new shares at the same price as the original shares (eg $1.00) to keep the relative ownerships consistent.

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Is this really the best option we have? I've been looking into making the investment as a loan to the company, instead. – blueberryfields Feb 23 '11 at 19:19
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Loan, definitely. Just document it with a promissory note.

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up vote 0 down vote

As mentioned, it depends in part on what business form you have, if any, although you still haven't clarified that. I'm not sure I would consider a loan to be an investment, after all, you're just expecting to get your money back in the future. If you want to get the benefits of your investment it has to be equity. If everyone else doesn't make an additional investment then everyone's percentage of ownership will change.

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