We received a term sheet from an angel investor. Now what?

The two original founders own 20% each while two current investors own 60%.

The two investors are interested in being bought out and moving on. The two founders want to stay with the business and grow it with the new investor. What kind of deal would allow us (founders) to RETAIN our equity or even increase it, while still getting the other two guys bought out? This new angel will want the working founders to have some “skin in the game” and we can’t do all the work ahead of us unless we have upside.

  • Dissolve your “startup” and try again. This time try understanding equity/angel/venture funding. 40% ownership after a seed round is laughable. Heavy handed investing in the first two rounds (seed, A) will kill a company before it even starts. You messed up, research more next time.

  • While I don’t know what sort of legal agreement you have with your original investors, generally speaking once you’ve taken money from someone and used their money to build out your idea you can’t simply liquidate the company and start it over again with a new name as a means to reset your ownership. It’s essentially fraud and if it were that easy to do you’d have a lot of entrepreneurs trying to screw seed investors.

    Rather than beat you up over a decision made early on, let’s focus on understanding your options:

    1) You can ask existing investors to refresh your ownership as a condition of liquidity for them. They want liquidity. You have leverage. Tell them a deal can’t be reached unless they give up some of their equity to the founders as new investors think the current structure doesn’t adequately incent you to perform.

    2) Ask for a refresh as a condition of the new money. If the new money really wants in they will want to make sure interests are aligned and may refresh your options a bit.

    There are probably other options as well but these two were top of mind. Good luck.

    • I agree the 20% each founder has is low. This is not an “app” or software business, but rather a “highway infrastructure product”…so manufacturing costs, R&D and other factors made it a big risk for our original investor.

      At the moment, our existing investors (60%) have agreed to sell at a certain dollar amount and they have agreed to allow us two founders to “broker” this deal with the new investor. What I’m hoping to do is convince each investor to make an adjustment to the equity table (pre deal and post deal) that allows the founders to hold more equity.

      The selling investors have also agreed to give us 3 years to pay them for 20% of their ownership (which could be an opportunity for founders to buy it back at a discount and increase our position)…but they have asked for collateral and I’m not prepared to do that.

      I’ve tried to research this “equity reset” concept online and I can’t find any details of it being implemented as a common practice.

      I should mention that we are currently a Limited Liability Company that would be re-incorporating as a Delaware C Corp (not sure if that makes things easier or harder).

  • You said it’s fraud to liquidate and start over, but I watched the primary investors in Lineo in Utah put it up for auction and then bid for it, screwing all the other investors out of every dime they put in.

    No one else would/could bid because they would be holding nothing if they got it.

    It’s dirty business and I’m not advocating it, but I don’t see anyway to stop that, do you?

    Other companies have done something similar to this to jettison toxic waste sites from their company.

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