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#24 The Week I Almost Gave Away My Company

10/28/2019

3 Comments

 
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For anyone working in the corporate world, there’s a book I highly recommend by Albert Bernstein called Emotional Vampires: Dealing With People Who Drain You Dry. As it turns out that not everyone has your best interests at heart and you need to know how to identify these sociopaths in order to protect yourself, your mental health and your career. The book has helped me tremendously.

In the start-up world, there are other types of vampires. This time they’re looking to get their fangs into your equity. Here’s some tips on how to ensure you keep the bloodstains off your shirt.

Now to be clear, I’m not talking about bona fide investors who are paying hard cash to buy equity at far market rate or professional services individuals/firms who add real value. I’m talking about the emerging industry of unscrupulous professional equity hunters who prey on unsuspecting early-stage entrepreneurs.

Just like Albert describes in his book, these vampires are charismatic and sophisticated so it’s extremely difficult to recognise them. If you’re not careful, by the end of the week, you might have parted with all of your equity before your company has even got off the ground.

The inspiration for this post came from an early-stage entrepreneur who I am helping with her fundraise. She is an experienced business person but was not au fait with the start-up world and her unassuming nature meant that she almost came unstuck. This briefly summarises her experience (in each instance I’ve used the lower equity ask. It really illustrates the point):

  • Someone offered to help raise funds. Asking price: 5% - 10% equity in the business, not even % commission on the total investment raised! This person was not clearly not shy. I wonder if they actually had contacts in the Angel market.
    • (Running total equity ask: 5%)
  • A head-hunter said they would put together the executive team for a mere 10% - 15% equity in the business. Amusingly, they said that if anyone left within 12 months, they would replace that individual ‘free of charge.’  
    • (Running total equity ask: 15%)
  • A marketing guy who does sales made a pass for 15% - 20% equity to help secure the company’s first few sales. The rationale being that the first ones are the hardest and pave the way for the rest so are a real value driver. You decide.
    • (Running total equity ask: 30%)
  • A tech co-founder asked for somewhere between 10% and 50% equity.
    • (Running total equity ask: 40%)
  • A consultant who claimed to be an expert in the field asked for a 6-figure salary and 50% equity or 50% revenue share. Definitely an expert in something!
    • (Running total equity ask: 90%)
  • Three non-executive directors wanted 2% equity each for their efforts.
    • (Running total equity ask: 96%)

That leaves 4% for the entrepreneur who poured years of effort into her start-up. That’s even before a single funding round. Ouch. Also, imagine how the incoming investors would feel if you asked them to pay for equity while handing it out for free to everyone else. I can tell you. You are unlikely to secure any cash.

Now before you get too paranoid, not everyone is fanged creature of the night. There are many good people out there and the reality is that you cannot build a world-class business by yourself so you will need to part with some equity at some stage. When you do, please just make sure it’s a sensible deal and there’s a long associated vesting period attached. 

Any entrepreneurs out there have any similar experiences? Please do share.

Anyway, until next time, look after yourself and your equity!

Alex @ The Tippy Top Blog

P.S. In case you were wondering, to date she’s only parted with less than 10% equity and is well on her way to success.

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Photo by Kyle Broad on Unsplash
3 Comments
Andrew Kirby link
11/18/2019 03:49:56 pm

At the beginning of my business I had a guy who wanted 35% of the equity to make an introduction to a potential investor. Not based on success, just the introduction. Also had a few prospective angels who had an arbitrary "I like to own 15% of the companies I invest in" while offering only 5k, for instance. "I like to own a whole car but I've only got money to pay for the tyres" doesn't seem like a viable argument at the dealership, but it seemed a valid argument for the angel.

Reply
Alex Leigh link
2/3/2020 08:27:08 pm

Thanks for sharing your many interesting stories Andrew. Love the car analogy - really puts that one in perspective! Speak soon, Alex

Reply
CP Controllers link
8/30/2023 09:50:54 pm

I liked your blog, thanks for sharing this.

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    Technology VC Investor - Helping entrepreneurs succeed through mentoring, networks and money

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