Lets say I have 5 friends who are willing to invest in my start up for a silent stake of my company.
What is the best term options for me as a start up and the best term options for me if I were the investor?
As the start up I can choose between giving revenue share and equity share. Revenue share being I give X% of my revenue for a set amount of years to my investors. Equity share being they get part ownership. Both have the investors being silent, non voting members correct?
As an example, I need $20K and I am willing to give up 10% of my business for that $20K. Each friend gives me $4K for 2.5% of my company. OR I could give up 2% of my revenue for 3 years for $20K, so if you invest $10k I give you 1% of my revenues a year for 3 years. I think this all sounds right.
As a start up would you be willing to give up a % to multiple silent investors, who will have no say in the company but will also not have experience or connections in the industry to help you progress?
Surely having these silent investors will effect me if I were to go for VC or Angel funding, how would you go about minimizing that effect?
Any help would be appreciated. Is revenue and equity really the only two ways for funding? Would you as a start up take the money from those 5 people? Would you as an investor rather want equity or revenue?
Thanks
The last thing a startup needs is to be paying out revenue right off the bat. Go get a credit card and bootstrap it.
Don't let any particular investor get more than a small part of the pie. Startups I've been involved with get really ugly when some douche who doesn't know anything about the business decides to change things because they have too large an interest. Maintain total control of your company until you sell it off......
I agree with Sean giving up precious revenue can have a big impact on getting over expense obstacles that can eat a fledgling start up alive.
What kind of effect do you think silent investors will have on you getting VC funding in the future? I think its fairly typical to have common shareholders that are friends and family 'aka silent investors' going into a Series A round and its nothing VCs haven't dealt with.
Also make sure its very clear with your friends what they get for their money, the valuation you're implying by getting 2.5% for $5,000, and the reality that they probably won't see this money again.
I second this. Angels and VCs are going to be less apt to put money into a business that is turning around and paying it out to other people. Give up a small piece and just be clear about the terms and when/if the people will get their money back...especially if they are friends and/or family...you don't want to burn bridges, even accidentally.
If you don't mind sharing, what space/industry is this in?
Regards
agree with above. revenue number is what the vc guys are going to look at first before the shareholder percentage. And to be honest, vc guys pay up to take over/dilute those "silent stake" all the time so it's not that big of the deal.
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