Along with my co-founder, I have started a new digital venture which we believe is innovative, game changing, with global application We have been working on our idea, refining it, getting feedback and designing the product for close to a year and have spent a considerable amount of time on the business exploring various possibilities, applications and formats for the product.
This year, we have started developing a prototype app using an outsourced partner, and hope to use this prototype to illustrate our business model to investors and potential clients, and get feedback from beta users. We have not raised any money, but have some commitments from friends and family for a small amount to help us further develop the prototype, invest on server side development and get as close to MVP as possible, and we plan to draw down on this in the coming months. Our plan was to use this prototyping to build some use cases, showcase the model and raise more money and/or get some brands involved.
I am the CEO and I own 52% and my co-founder has 48%. I am responsible for marketing, strategy, fundraising, and my co-founder is responsible for product and technology. Neither of us have any blue chip experience, though I have been in small startups since 1999 and have built small businesses, have experience from set up, planning, recruitment, fundraising, marketing and global business development. My co-founder is a product specialist and a bit of a genius, and whilst he has not got significant start up experience and is not a CTO as such, he understands technology well and has managed big tech projects and has developed apps in the past.
I have stopped working full time and am now working 1 week a month for my previous venture to help pay the bills. My co-founder is still working and will need more funding in the bank before he can drop his day job. He is nevertheless working on a daily basis in the mornings and evenings with our developers to get the prototype ready. Neither of us have significant amounts of cash liquidity, though I have recently remortgaged my house to provide some cash buffer so I can justify spending more time on the new venture. We have a road map and are working at a pace that I would call slow, though given our idea is innovative and operationally a little complicated, we want to have real use cases and a proof of concept to be able to justify larger amounts of funding that would be needed to build out the business and bring in more people to help scale it.
Nothing too out of the ordinary there I hope. Now, we were not planning on bringing on anyone else to the team in the short term, though someone I have known for over 10 years has decided to quit his very senior partner role at a global management consulting firm and is extremely excited by our idea. Let us call him John. John brings global marketing experience, access to high profile contacts in our target segments, access to capital (which he claims is easily available given the business idea), and operational experience in India, a market that we have been considering to launch in outside of our initial UK market, and also a market that is witnessing crazy amounts of startup activity. We were not planning for him, but given he is available and wants to join, we are making an exception to consider him. He wants to join as a co-founder and is expecting significant equity stake, in the range of 20-25%. A quick and dirty pros and cons analysis, based on our own evaluation and John’s inputs is as follows:
- Strong global and relevant brand profile – adds credibility to our business
- India location and network – if India passes our proof of concept, he will be around to get things moving
- Provides new perspectives – we need independent inputs to the business, as my co-founder and I may have lost some perspective given our bias and passion for the idea.
- His network will be very useful, both in terms of corporate clients, fund raising and support, not just in India but globally
- He is genuinely excited and charged about our business idea – no one has shown this level of interest and commitment, let alone anyone of such seniority
- Helps accelerate our plans – I need someone available to bounce off ideas, get feedback, discuss strategy. Since my co-founder is still in his full time job, there is a void, and we will need more commercial inputs from a larger team in any case.
- No pure start up experience. By that I mean working in small teams, long hours, with limited funds and resources.
- The overlap with my role – there is clear overlap, that is obvious, hence not crystal clear outside of India role on on how that will work in practice
- Expectations on equity – wants to be a co-founder and expects a relatively “large” amount of equity.
- Working dynamics not tested
- Big change of environment from prestigious global professional services firm to start up (though he has done an internal startup at his previous firm)
- We will need other roles to be incentivized, and need to preserve equity for future members
- He is based in India (though mobile) and we are not!
- We are too early stage to bring in someone senior like him. He has little to lose and can easily find himself a senior role if things do not go to plan, and he also does not have the same financial constraints that my co-founder and I have.
My co-founder does not know him and was initially skeptical, but he sees the value he can add. Though my co-founders expectations of what he is worth is much lower than mine which in turn is lower than what John would expect. My co-founder is also not fully sold on making this third person a co-founder, though I am of the view that if it motivates him and helps him put all his energy behind his work, it will only be a positive. My co-founder is of the view that John should have his equity linked not only to time, but also to measurable targets/milestones. John is happy with vesting, but wants to vest with time and not targets or milestones, as we do not specifically have any as the primary co-founders. I am of the view that any structure should be simple and provide strong incentives and keep John hungry, but also protect the company should things not go to plan. Further I feel that we are so early stage that it’s difficult to put in too many measures in a business that has still not been commercially validated.
If any one can provide any perspectives on this, it would be much appreciated.
Should we take someone like that on?
What range of equity dilution would be reasonable? (we have a notional valuation of $2mn pre money, that our friends and family investors will be invest at)
How should we structure the incentive, in terms of vesting (3 or 4 years), and should there be measures other than time (operational measures, revenue measures)?
Should his equity stake be based on pre-money or post money (given we have committed friends and family for a small round)?
Should his stake be separate to any stock option block we allocate (which we have not yet had the need to do)?
How do we set the right expectations?!!