legal, founder, investors, stock, business-capitalI have a little startup situation. Of course all the characters are fictitious ;)
A few years back, four persons decided to start a software startup. Things were as follow:
Capital: $10.000
Mister A and B are experienced businness managers. Mister C and D are young software engineers and know nothing about business and management.
For the past year or so Mister A and B have been working closely together on customer development. Mister C and D were sometimes consulted on some technical points.
Now the startup has a few clients so it doesn’t look so bad. Mister A and B then told Mister C and D that the capital needs to be increased to $20.000 so that banks and other investors take us seriously.
Mister B, who has been working more than Mister C and D, proposes to invest in the startup. The result would be as follow:
After that Mister A will increase the valuation of the startup and look for external investors. This means that the shares of Mister C and D will again decrease.
Mister C and D are confused. They know that Mister B worked hard on the startup but feel that going down to 10% is a bit harsh.
So here are the questions:
EDIT:
The goal is more to reward B for his work. Most likely C and D will express their interest in investing as well. In the end, I think everybody still want to work together.
A and B worked closely together because they get along well, know a lot about customer development and have lots of relations. C and D want to get involved but have been (un)intentionally “left behind” for various reasons but mostly because they’re young programmers.
I understand there might not be any right answer to that. It’s a matter of opinion.
Mister A and B then told Mister C and D that the capital needs to be increased to $20.000 so that banks and other investors take us seriously
That’s a lie right there. I thought you said Mister A and B were experienced business managers. Sounds like an excuse to dilute or get rid of Mister C and D.
What about you pay C and D a fair wage instead of stocks that you intend to cut in half for no reason?
First point is about investors. The total capital is 30K euro, which equals roughly 1 year minimum wage. No investor is going to care, we all know this. Best to be open about intentions; startup companies are fragile things; best not to wreck them with some political game.
Second point is about valuation of work. Most people value their own work over different kinds of work. I would be surprised if mister C or D pro-actively said that mister B works harder than they do and therefore should get more shares. Or is it about time? I would be surprised if mister A and B spend 40 hours a week and mister C and D only 8 (That’s not how startups work). I would however not be surprised if mister A or B pushed the ‘status’ of mister B (you explicitly note that they are friends, I guess not without reason). I’m just guessing here- but I think it’s fair to assess how you guys got to this point.
Third point is about greed. If that’s what’s really going on (not saying it is, but if it is you usually just know), I’ll be as clear as possible on that subject: Really, as a startup you just cannot have that. Best to eradicate that right away.
Last point is one of concern. If you have a start up company that’s selling a product, how on earth can the sales be more important than the product? After all, we all know you need something that you actually can sell before you actually do sell. If A and B are experts and C and D are students, you’re off balance and need to fix that - which is IMO a good investment of any 20% shares.
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