Do investors run away from entrepreneurs that have interests in 2 start-ups at the same time?


3

I am involved in 2 bootstrapped startups at the moment:

  • startup 1 : I am a co-founder, have executive position and I work full
    time on it
  • startup 2: I am a co-founder and provided a quite unique technology which is the core of the only product of the company. The tech is robust, so my involvement is more to discuss strategy and rare tech support.

Now is when things get complicated. Both startups are now going to be chasing investment and I can see problems in the horizon...

  • Startup 1 is getting a lot of traction at the moment but, even though my involvement in startup 2 is only occasional, I am paranoid that investors will not like me having an interest in startup 2.
  • Startup 2 does not need me full time at all but, since I am a co-founder and provided the main tech, the CEO understandably includes me as an integral part of the team... There was a mention to give me a part-time salary to show to investors that the founders are still part of the company.

Provided investors like startup1, would they accept me having a minor involvement in startup2? Is that a NO GO? Is there any way to defend the point if they see it as a conflict of interest? Is getting a part time salary in startup2 a bad idea?

For startup2, what is the best way to reassure investors of startup2 that, even though I work full time on startup1, only occasional involvement would be required? would a part time salary reassure them? or having shares should be enough commitment?

I know is messy... any help would be great!!!! cheers

Co-Founder Conflict Of Interest

asked Sep 27 '12 at 05:10
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Wewill See
53 points

3 Answers


2

Take a look of those 2 posts:

From Brad Feld
http://www.feld.com/wp/archives/2005/07/term-sheet-founders-activities.html “Founders Activities: Each of the Founders shall devote 100% of his professional time to the Company. Any other professional activities will require the approval of the Board of Directors.” Venture hacks in this post talk about it
http://venturehacks.com/articles/not-so-scary-terms-in-offer-letters They say that: "The company isn’t forbidding you to work on your own business on the side.
Get a lawyer to advise you on what you need to do to own your side business. At a minimum, work on the side business on your own time and don’t use anything owned by the company.
It would be interesting to get the opinion of founders that try to do it but were not allowed, or from founders that managed it

answered Oct 11 '12 at 05:50
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Mga
21 points

1

So the first point to make is that it's a matter of fact and of record that you are a co-founder of both Startup 1 and Startup 2. Given that both ventures seem to be making good progress, that makes your resumé a positive value to each startup.

Secondly, though you don't explicitly state it, I can't believe that the two are competitors, so there wouldn't be an issue if (say) you were planning to be pursuing each half-time, by agreement with the respective teams and investors.

You're right that, all things being equal, investors like to see people 100% committed to their venture. But, of course, that is never going to be the case. We all have some kind of life outside of the day job, even if sometimes it doesn't seem that way. And sometimes the two will overlap. Investors know this. And, while they might not like it, they accept it - because it's reality.

So there's every possibility you can be all in on Startup 1 and still involved in Startup 2, and see both successfully funded. To maximize your chances of achieving that, your first step is to negotiate with both startups pre-funding.

My thought is, start by talking this through carefully with the team on Startup 2. Are they clear, and comfortable, that the first call on your time is Startup 1? What do they need from you now? What do they want from you during a funding round? What will they need from you post-funding? And what would it cost them - in time, money or any other way - if you had to cut all ties?

Next, you have a similar conversation with the team on Startup 1, only this time the question is, how do you formalize a personal commitment to Startup 2 that's acceptable? Look at different approaches. How would it work if (say) you wanted the ability to take out up to half a day each month? Or if you had to commit to only using time out-of-hours?

If you can come up with workable arrangements that everyone is happy with, then you have a credible starting position to offer to prospective investors. And you're also armed for a negotiation, if it turns out that this arrangement is actually preventing you getting invested: you're in a position to take a clear-sighted view of what would be the cost to you of being forced to exit Startup 2.

It's not exactly the same situation, but I was once in a startup team looking for substantial funding for a capital-intensive business. It was the norm in that sector for investors to insist on personal guarantees from the directors - they wanted everyone's houses on the line.

We were a credible team with a proven track record and a strong plan. And we agreed between ourselves that we would not offer personal guarantees, and that we would put this on the table up-front.

Plenty of prospective investors tried to push us on that. We never wavered, and of course that ended the conversation with some. But we got funding, on terms that were typical (i.e. there wasn't a cost to us of holding this position), and with no sense that it took us any longer to raise money.

Looking back, I think that the fact that we had worked through together issues such as, what motivated us individually and as a team, how would we stay focused on delivering results and so on gave us credibility. And holding the line on a decision we had come to together also showed that we had maturity as a team. So we looked like a better risk than a less tight-knit team. So who would get backing - the team more likely to succeed, or the team more willing to get caned if they failed? I'm not saying we didn't have to keep on restating our position and check contracts very carefully, but it worked for us.

Investors are (usually) reasonable people. And, if you're sufficiently transparent with your business partners that they are happy, and sufficiently objective about your own situation that you have a plan if you find that the situation is not just unusual but actually turning out to be a roadblock on investment, your situation may be to the benefit of both startups.

answered Oct 12 '12 at 14:42
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Jeremy Parsons
5,197 points
  • Thanks a lot for your informative reply Jeremy. I can see some room for working a solution out to keep all investors and startup founders happy. – Wewill See 8 years ago
  • So, basically, this is the plan. First, to get an agreement of mutual understanding between the 2 start-up co-founders about commitment, expected involvement... Second, to go to the potential investors of startup 1 and describe the situation with complete transparency. If they are not happy with it, reevaluate the situation. Thanks Jeremy! – Wewill See 8 years ago
  • How did it go...? – Jeremy Parsons 8 years ago
  • Hi Jeremy, thanks for asking. Moving very slowly ... We, unfortunately, have not found an agreement with the CEO of startup2 who would like me to have more involvement than I thought in startup2. So, still in step1... thanks – Wewill See 7 years ago

0

Why dont you asked them? There are bunch of VC that are communicate with the entrepreneurs and im sure they will help you (e.g. Marc Suster, Brad Feld etc).

answered Sep 27 '12 at 17:32
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Mojsilo
594 points
  • Thanks mojsilo. Knowing their view on this would be great. The problem is that both start-ups are going to be approaching many VCs independently to get funding. Thus, I would not like to take the risk of one of the 2 startups approaching a VC I previously contacted for advice on this issue. Thanks!!!! – Wewill See 8 years ago

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