Hi, I am involved in a start-up since the year 2014 as a co-founder. This year in Jan 2018 we finally established the company and we had the shares distributed amongst 4 cofounders. I am the co-founder who owns least of the shares i.e. 8 %. Since, I already have a job and I am only supporting the startup part time. Now, we have a debate in the team that, Since, we want to go to investors, Investors does not really like the idea of having a part-time cofounder with 8 % of shares. The idea proposed is to shift me to an advisory board with shares less than 5 % and rest all shares can be transferred to me once I join the company full time (as in a separate contract with one of the other co-founder). 1/3 of my 8 % will be vested on Jan 2018. I don’t have much of an idea about what is the best possible way for me and for the company, as I don’t want to hamper the development without compromising on my shares value. We have got the valuation done last month and it has been valued in the range of 1-1.5 MEuros (pre-investor money). what is the opinion on investors having bad outlook towards co-founders who are involved part time. How much shares can a member of advisory board hold and vest as well (typically in a startup) Thanks for your insights in advance..
Anjan, Unfortunately part time founders are a big turnoff to investors. They usually expect a 24/7 (or more) commitment.
Dear Anjan, My input, from top of my head.
First what does "part time" specifically mean, is it real half-time 20H/week or is it just 5H/week. I think that is an important part of the picture.
Then, I guess one reason to get an investor, is so you all can get to work full time and move faster. Right. Didn't you all 4 dream about being self-employed..... And in that aspect is there tasks enough for you to do full time (if you got paid a salary).
If you want to work there full time then it is not fair you get reduced, but if you want to do something else in life then it may be fair you reduce your stake.
You have been on from the start, so I assume you know many things. If so, and if your work brings value, then I think an investor would want stability = want you to continue work.
And "adviser", really, unless you are a known force in your field, advisers are just to fill out the empty space on the page called "Team". In my experience investors value hands-on people far higher, people who get things done, who say "I did this", I failed 3 first times, but I got it done..... rather than advisers, who talk about how it may be done (knowing your team has not got enough hours to do it) - note at Mckinsey they actually do real work in client offices, and that is the real value!
Generally I could say they are looking at it the wrong way. Another way is to highlight there is immediate extra resources to boost, you and need no training, you can hit full time for 100% power forward 10 seconds after the investment is in the bank !!!! (unless your work is so basic that any person can do it, like sorting out red and blue pens).
Sorry, do you sense they are trying to "exit" you. Are there disputes internally? I sense there is more than you write..... It is never a good sign when someone has to dilute more unless it is logically and proportionally related to the work you provide.
Do any of the others get paid for some time? Is one setting on the bank account, or have you got transparency.
Do the rest work full time, or how much per week. All equal if you are 4 owners and all spend same time then it is 25% for each. There could be a moderate bonus first for the idea owner, e.g. 20%, then last 80% is split 20% for each. That is if everyone work the same.
Do not forget that work hours is a valuable commodity for start ups.
Lets say 3 work full time = 40/week x 3 = 120H
And you 20H/week = 20H
then the factor is 140H, and ignoring other considerations (than the 20% to originator) then 80% / 140h x 20h = 11%
Additional, I assume 8% was agreed previously. So why should you say yes to less now when finally an investor is closer ....
I mean if they gave you 8% and find it too high now, then they made a mistake, where I come from you pay for your own mistakes, and I am very sure a professional investor will demand the same (you fxxx up, you get fired by the investor).
Stay with the 8%, say you want to go full time as soon as possible (if it is true, don't pretend), and it can be discussed when there actually is an investor in the room with a pen to sign the contract.
If they want you down 3% then suggest it is divided by 4 = 0.8% for each.
But that is assuming you did your part, on time, and state of the art. And always had it as priority 1 or 2....
If you had this as priority 4 or are a "drifter" or I have to pick up my wife.... bla, bla.... then it would not be fair to block the others.
Finally, are you all diluted equally proportional.
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You might not realize this bit it looks like they are trying to make you understand to commit or get paid less or for an amount of time that will increase or shares that will forcibly get diluted over time.
Advisory board members have their fingers in a lot of pies not just one.
I do not know if your plan puts this looming issue to bed. Perhaps others on this board know 5% is some magic number, I do not. I do know that potential investors will test the equity the founders bring to the table. You seem to be in neither the 'sweat' nor 'capital' side of the equation (at least moving forward).
Even if a 5% plateau was the magic limit, the mechanics you discuss are tangled. If I read it correctly, there is a 'hold some of my equity, I'll be back for it later' component. I'm not sure I'd do that under any circumstance. If full-time status is the retrieval trigger, how do you know you'll really control that when the time comes. Post-money (and post-dilution) will all the owners vote 'yes' on that at some future date. Then shifting stock around might introduce valuation, transaction, and tax items (I would think). Net: This is all a lot of effort to help the guy standing outside the trenches. Even if it were contractually tight, the plan seems poised to invite more investor scrutiny, not less. The safety of a full-time job creates a headwind questioning your faith and commitment and sending investor conversations sideways.
More importantly, investor funding will mark major milestone - it would be off to the races for the company, the next chapter. I would ask myself if I wanted to be on the outside of that. Your co-founders (and even the new investors) will develop a team persona. I am sure they feel the love for you, but you would not be there through the challenges and successes. (Also, you are very early in the game. You should give up – or jeopardize - equity for only the most necessary of reasons)
For the team and the company - I think you the whole gallery is asking what side of the line you are on. And for you personally - I think you are trying to craft a complex permanent solution to an important, but temporary challenge.
I hope this holds value.