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Being Pressured To Sell Out

I used to be the founder/CEO of a hardware startup. We raised over $100k in equity but also about $750k in debt financing from one of the angels who initially invested. We gave away too much equity and the whole thing was set up for failure to begin with. And yes, I know, we should have never gone for the deal and we screwed up in a way. It’s an overseas startup, and finding financing had been pretty tough for young, first time founders of a hardware venture.

To make a long story short, strategic differences surfaced between the investors and myself and I was kicked out. Anyways, now only a few months onwards, I have only few regrets, given that despite all I got a great learning experience out of it.

The company has launched the product, but sales are rather mediocre and disappointing. Much of the team has left. I still hold my vested equity (about 22%) and now the investors want to get somebody else on-board to turn it around and use my shares to do so.

They offered me $20,000 for all of my shares. I asked for more, but they put it this way to me: If I don’t take the deal, they will invest the money owed in debt, and then pay back the debt. As a result of the equity round they’d lose their debt but my equity would probably get diluted to the lower single digits (2~5% – depending on whether they could get away woth a down-round).

To be honest, I don’t think the company will ever result to anything anymore. But they still hold patents to the product made, which may be worth something in the future. But then without a good team behind it, I also have my doubts of this ever resulting into a big sale.

Anyways, I’m torn about what is the best course of action. I have a job at the moment, which pays reasonably well, but getting $20,000 may also do me well. I could live off that for 6-9 months and work on a new product and get something else started. Whereas 2-5% of a dying company may never result in anything.

Thoughts anyone?

  • That’s a tough position alright.

    In your situation I would probably sell the shares and go for the 20k.

    Its not really about the money. Its about ending the nightmare and being free again.

    I would go ramen-noodle style and live dirt cheap so the 20k will last a long time, while working on something new that looks promising 🙂

    You can do this.

    Reply

  • A bird in the hand!

    I totally agree with the advice above. Bring closure: take the £20k, stop looking back and start thinking about your next venture. Maybe, use the £20k as seed for your next project.

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  • I am with the above people, take the money and run. Close the door and then go do your own thing again, perhaps without the bad investors. You get to sleep at night knowing it’s done for YOU.

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  • Anon above said “Its about ending the nightmare and being free again.” Agreed! Take the least complicated and “selfish” path. See if you can sell off the patent.

    Reply

  • I would personally take into consideration your own financial situation.

    The dilution can occur only if you aren’t willing to protect your equity in whole or in part. If they’re truly going to raise an enormous amount of money, this won’t make sense – but it seems more like a down round to me where $500K will basically quadruple the outstanding shares (or more). If this is the case, then putting in $10K would maintain at reasonably high level of equity ownership still. The bigger the share issue, the lower the cash you need to keep up your equity percent – as they cannot legally prevent you from participating in the down round.

    The real question is: why do they want you completely out? As they have already turfed you out, it certainly isn’t a control issue – unless they’ve been offered to get bought out only if 90%/100% of equity holders agree – and in this case, the deal you’re being offered is a(nother) screwing.

    Reply
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