Having less equity than an investor


5

Suppose a company (C-Corp, Delaware) with 5 co-founders, each having 20% of the shares.

Then an investor wants 30% of the company, which will leave each co-founder diluted to 14%.

  • Besides control (does this apply?), what could be the risks and the issues of having the investor holding more equity than any co-founder?
  • Is it common (at least for companies with lots of co-founders) to have someone outside the company holding more equity than any co-founder?

Note: I'm not downplaying the control issue. I just believe that this can be addressed. If you disagree, please feel free to consider control issues in your answer.

Equity Legal Delaware

asked Mar 27 '12 at 00:37
Blank
Anon User
62 points

2 Answers


4

In a company with multiple founders, it's definitely common for an investor to have more equity than a single founder. If it weren't, then you'd be limiting your investors to about 15% of the company.

The main thing you want to worry about is giving control to your investor. If he gets 30%, then he still hasn't hit 51% and can't control the company by him/herself. But, it does mean that the investor could pair up with 2 of the founders to control the company, since they'd add up to 58%. So, how tight are the five of you?

Recall, though, that the company is managed by the board of directors. So, the control isn't direct -- the investor and the two founders would elect the board, and then control the company through that elected board. So, the goal should be to keep that scenario from happening.

So, what can you do? With any investor, you should have a discussion and agreement about board composition. For example, the investor might get to name one board member, and the founders get to name the other two. And then you'd write up things that have to be unanimous -- going into a completely different line of business, for example. That keeps control with the founders, but gives the investor the ability to be part of the conversation and to veto major changes.

answered Mar 27 '12 at 00:53
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Chris Fulmer
2,849 points
  • Then again if it's a C-Corp, you can have multiple classes of stock. Founders shares could have stronger voting rights than what you issue to investors if you're worried about maintaining control. – Mike Christensen 8 years ago
  • @Mike - any savvy investor is not going to like that at all. In fact, most times the investors have veto and other rights that the founders do not have in order to protect their interests. – Tim J 8 years ago

-3

If its your initial investor starting just starting the company. I would say 10% of the company is good for each 20k they put in. I might be low balling or high balling it. But that sort of math is what I used as well as what YCombinator (Total Theory, don't know actuals) uses.. They tend to put in 15k for the summer events they hold, and they tend to expect back between 7-12% of the company. Again, I have never gone through YC, nor do I know actual numbers, its more or less what I come up with after seeing over and over again what they put into a company.

answered Mar 27 '12 at 02:35
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Spoiled Techie.Com
102 points
  • please explain why it was voted down. – Spoiled Techie.Com 8 years ago
  • Re: the -1 downvote... I generally don't explain downvotes, but in this case, why not? I don't know where to begin. For one - you don't even begin to address the questions asked. Two - you are making up numbers for valuations and percentages without knowing anything about the investor, business, etc. – Tim J 8 years ago
  • One, I agree with you. I don't address the questions asked, but I do give him an example of how much equity was shared with other investors. Two: I am talking about two business I know a bit about. Mine of course, and well YCs model, I have been following for a long time. Long time. If you are talking about his model, well your right, if he was more descriptive, then maybe I wouldn't haven't answered, but I gave him another thing to think about other than the two questions he asked. Thanks for explaining though. – Spoiled Techie.Com 8 years ago
  • I didn't downvote, but I would if you were not already at -2. The answer is bad and misleading: "10% for each 20k" is really bad advice. Emphasis on the "for each". That's not how you need to look at valuation issues. You also completely misunderstand how Y Combinator works. – Alain Raynaud 8 years ago
  • Alain, would you like to tell us how YC works then? – Spoiled Techie.Com 8 years ago

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