Hey entrepreneurs, I have a question regarding a seed investment round and would like to hear your opinion. I am the owner of a design/development agency and 1,5 years ago I cofounded a startup with two friends. The deal was, that my company designs, develops and maintains a webplatform for a fixes time horizon (1,5 years), while the other guys are working on the business side and that I take a 23,5% share in the company for that. Myself took the role of a product-manager on an almost-fulltime basis and was also involved in every strategic decision. The product is already live for more then a year and has a lot of traction as well as revenues. According to the agreement, I (and my company) want to quit now and minimize my commitment completely, while maintaing the 23,5% stake in the company. On the other hand, after having bootstrapped for 1,5 years, my cofounders want to raise a seed round now. However, they say that it will be impossible (or difficult) for them to find an investor if I (or my company) have a 23,5% share in their company without being a (committed) team member in the future. They claim, that a too large stake is "dead equity", which is not contributing anything to the company. Every investor will now refrain from investing in the company. I claim, that my role in the beginning was more the one of an " angel investor". Instead of investing money I agreed to bring in a service with the value of XXXXX€ as we have built the product for free and only took a share for that. What is your opinion about that? Is it true that we took a too large share in the company early-on and that every seed investor will now refrain from investing in the company because 23,5% is in the hand of an investor (my company) without contributing future money/value? With that logic no company should get a business-angel on board early on because it will deny every future seed round. Could some guys with experience in Venture Capital give their view on that topic? If any further details are from interest, feel free to ask me. All the best Jack
I agree with Tom. You and your share will be diluted with added rounds of capital. New investors will likely require convertible preferred shares with additional voting and conversion rights. If you hold common this should not affect them at all.
If you hold preferred (which is not likely), they will simply require that you modify some of your rights so that they can get the deal they need. This can easily be accomplished by a good attorney.
Bottom line is that if the company is attractive to potential investors they will work current equity holders to get a deal done. All of the founders will be diluted with successive rounds of capital.
Answered 10 years ago
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