I wish to seed my new business with about $120k, of which I need to raise about $90k.
I prefer not to go professional seed investors as:
(a) it could take some time (which I don't have);
(b) it may be a problem down the line with new investors if the original ones don't stay;
(c) i have a network of business associates that would each be willing to part with small amounts (say, parcels of $3k-$5k)
I heard a rule of thumb that says equity could be split as 50% to the workers and 50% to those providing funds. Using this rule, raising $90k and providing $30k would leave my associates with 37.5% of the company - or 1.25% for every $3k put in. Does this sound right, or is this too high?
Similarly, what sort of vehicle (terms) would you typically use for such a transaction and how do you address the risk of investor dilution for future funding rounds?
The terms all depend on your overall fund raising strategy. If the $120k is a bridge to your first funding round (A-round), then the best way to go about this would be a convertible note.
The convertible note would convert at the A-round price once you raised the A-round. This has several advantages, which include:
Investor dilution will depend on the A-round size and price. This is unavoidable and can be dealt with using preferences.
Typical stock splits for a VC backed deal is 80% for investors and 20% for employees but that depends a lot on the amount of money you take in total (since the 80/20 will settle to that over time).
Terms for notes like this include: