We have founding partners who work for our start-up company full-time. We are now having a first external equity investor coming in. We have enough financing to last about one year at which time we target to break-even financially. Our new investor is concerned what happens if we run out of money and revenue is not high enough to at a minimum break-even after one year and due to that one or more founders leave the company and go for new challenges and they are left with the worthless company with no employees and no cash.
Are there any techniques legally to guarantee that investors are secured in that respect for some time period?
This is always a problem when investment is in people that can walk out the door (or get hit by a truck). Ultimately it is about faith/trust ... you can put in all the legal clauses and rack stock options to milestones but if the angel investor is the wrong fit for the startup, then it will only be a waste of dumb money. Some questions you should ask are
I seriously recommend you find the nearest angel group and try to find the best fit (market, investment philosophy, domain knowledge) ... it is almost like a marriage and nobody wants a hectoring mother-in-law.
Great question. There are several ways you can address this type of situation. In a stock-purchase agreement for the new investor, he may consider requiring the founders to stay on for a year. A different approach could be to structure the pre-mature departure of a founder as a trigger to compensate the investor.
Maybe the compesation of the founders could be changed to a merit-based system that will not drain the company if revenues fall.
It is fairly common for officers and especially founders to agree to a non-competition clause. This might also offer the new investor some security.