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I've been working for a few years in a small IT consulting company. Recently, I came up with an idea for a software product (unrelated to the company's core business), presented it to the board, and they decided to give it a try, under the following model.

They will create a new company just to develop that product, that will share almost everything with its parent: office, employees, hardware, etc. Initially, the new company will also have the same shareholders and a predefined initial investment.

What's interesting is that they proposed me to put some of my own money in that initial investment (although much less than the shareholders are putting) and I will have the option to buy a position in the company later on (for a predefined small value). This all looks fine to me, but I have some concerns about the project's autonomy.

I will be technically responsible for the project (just as if it was a normal project in the main company) but all major decisions (financial, hr, marketing) will be made exclusively by the board.

What's your opinion on this? Should I require my participation in all (non-technical) decisions? Also, do you have any advices or related experiences to share on this kind of model?

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2 Answers

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The general situation is awesome. I know someone who took exactly this style of deal and it's paid off well.

I like that you have to put in a symbolic amount of money. It's true that's a sign you're really in this.

However:

  • If for that 1% you get only 1% of the company AND if that's anything but preferred stock (e.g. common or options), that's bullshit. You're going to pour your heart and soul into this, and if it's a good idea (which given their enthusiasm it probably is) you could probably get outside investment instead and keep a large percentage of the company without putting in any money.
  • If the 1% is symbolic AND you get more like 10-20% of the company, that's OK. The option to buy more later is good, especially since stock is often diluted and this gives you the chance to prevent dilution. However this probably also means an amount of cash you don't have available, so it might be moot.

I recommend shopping your deal around. Tell your company:

This is a really terrific offer, and I really want to do it. However for my own due diligence I'd be remiss if I didn't explore other options for building out this idea. I'm going to get some advisors and make a firm decision within 60 days.

Then do that -- get some advocates you trust and shop it around, probably locally, and see what happens.

If you're afraid that would piss them off, and you really really want to do the project, don't shop it around. If this is your first deal, and if you really want to make a go at it, it's probably better to just do this and get the experience. You'll learn a ton, and next time around you'll have a great resume and you can do whatever you want -- fund it yourself or raise money.

Finally, you have to decide how important it is to you personally to "have control." There's no correct answer -- you can decide that "controlling my own company" is more important than money, even if it means the company isn't even going to materialize, or you can decide that you'd just like to see the idea unfold and be a part of it and learn etc..

You can't go wrong! But you need to decide what's going to make you happy and work with your own career plans, and then behave consistently with that choice.

Good luck! It's sounds like a great opportunity.

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Thanks for the motivation! I'm just very happy that the company is betting on my project. Controlling the company/project is definitely more important than the money, so I will try to negotiate a position in the board. – Pedro Dec 9 '09 at 22:33
I imagine it will be hard for you to keep any kind of control within your company, because they're putting in all the resources (money) and because they're taking essentially all the risk, and because you're already establishes as an "employee" to them. However it's worth a try... you might need to shop to get control AND investment. – Jason Dec 10 '09 at 20:28
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Huh? They want you to front money and then also have to buy in later? That sounds unreasonable. If you are putting in money up front then you should have the same cost basis in the beginning and same share value.

Options to buy later on are independent of that I hope.

Maybe I misread/misunderstood the explanation.

I would not require anything about your decisions, etc. I would expect though that they might give you a lot of leeway and take your opinions into consideration.

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Compared to the whole investment, the ammount of front money is just symbolic (around 1%). I guess it's only to give me a superior level of commitment than a regular employee. The buy-in option will be for 20% of the company, also for a small ammout of money (definitely not 20% of the valuation). I guess this may sound weird, but after all is a project for their company, not my company. – Pedro Dec 8 '09 at 22:34
OK, but for that 1% do you get immediate founder and voting shares and possibly a board seat? – TimJ♦ Dec 8 '09 at 23:05

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