Big data · Entrepreneurship

Can I raise a Series A to spin off a company?


Last updated on September 18th, 2017

I developed a project with a big data company, but all IP rights belong to me. Now that the concept's been fleshed out and tested, the company's given me two options: 1. give up all equity in exchange for a $5M budget to run a new division as a salaried employee; 2. spin off the concept into a separate company, raise the money on my own and enter into a joint venture.

I'd clearly prefer the latter, if I can raise the money. My choices for the key roles (i.e. CTO, COO) are ready to roll. But, we don't have a history of profits like most startups do when they raise a Series A. How likely is it to overcome that issue with VCs or later stage investors? Would a PE firm consider this? Has anyone been in this position or known anyone in this position?

David M

September 18th, 2017

I would say it depends on what the projected long term value of the company is and how bad you need the money. A $5M budget is nothing to walk away with ease. Also depends on your salary and benefits. If your salary would be $100k a year, and you think you can get 10 years out of it, thats a million dollars. Add in another $20k a year in health and benefits baseline, and thats not counting the compounding aspect of that money invested. So now ask yourself do you think you can make more than $1.2M for yourself over the next ten years on your own. But the other thing that Im not really following here is the equity. Anyone with an ounce of negotiating ability and tenacity can get a small but meaningful portion of equity. No history of profits? or no history of revenue? Of course all investors are going to consider your capital structure and your history of performance. And that is not something to take ALL. If you have ever spend much time with investors that is one of the major elements they want to see.

Here is another thing to consider, and perhaps HUGE. This company values YOU. They are giving YOU a budget. Investors, VC's PE's especially may value your amazing widget or IP, but might not value you. And they will likely want to have at least a couple of their people on your board. From that standpoint, if you like the people you are working with presently, personally I would have to have a LONG line of investors who have put contracts on the table with serious intent, before I walked away from a sure thing and a company that is stacked enough to provide you with $5M and a salary.

I would also ask if the company you are working with has an interest to be in business with you if you go out on your own. And if they don't is it something they could easily replicate and create on their own. IP is important but also over rated when it comes to the corporate world. Do you have the money to defend your IP? Most entrepreneurs dont consider that part of having a patent or copyright..etc is defending it. What good is a product that you think can make $20M in sales a year but will lose $15M of that due to infringement unless you have $3-5M to defend and prosecute violators? Can the company reverse engineer and create a superior IP and then press you for a licenses of your IP in a way that you have no choice?

I would be the first to say if you think this IP is worth hundreds of millions or billions than sure...know your worth and work toward it. But finding $5M from the investor world for an IP that is not yet proven....thats one of those "you have more chance to get hit by lightening" myopic but often true stats of the business world.

But again, you have given very little information so far. If you have the next facebook, then no you dont want to sell out. Tell the company you greatly value their partnership and interest, and you want to be in business with them, but you would appreciate a % of NON-Dilutable equity to move forward. If they are the right partner they will come back with some offer. If they don't, I would consider that they are too greedy and probably hit the investor circuit knowing it will be a long road.

Happy to sign an NDA and review further and consider if I have any investor sources. Best of luck-David

Steve Owens Startup Expert

September 18th, 2017

Its not difficult to raise money, but it is a lot of work. Most companies go through several stages: Friends, Family and Fools (the 3 "Fs"). Then a seed round - angels, strategic, high net worth individuals. Then VCs - Series A then B then C. Its hard to skip steps. Expect this in terms of money, time and effort

- FFF $100K 3 months 100 man hours

- Seed $1M 1 year 1,000 man hours

- VC $5M 1.5 years, 2,500 man hours

Note - most companies start the VC round while still in the seed round.

I would recommend you go back to them and negotiate a third options - "earn out" (get a lawyer to help you write it). This earn out would work like this:

- They fund the $5M

- Your the CEO with complete control

- At the end of 5 years they get control back, but you get a bonus based on the performance of the business at that time. For example, if the company is now worth $50M, you get 10%, or $5M.

Many people can not raise money - you could be one of these people (although you may be capable of many other things, it not just about intelligence). By going alone, you run the risk of ending up with zero. I would argue that in the end you will end up with more taking the $5M with an earn out given the risk of being able to raise money and the distraction of trying to learn how to do it. You can put all the effort into growing the company by taking the money now.

If you raise money, it is unlikely you will end up with more than 10% equity, and that equity will likely be common stock which will be subject to "preferences" (maybe worthless even if the company is successful).

Craig Lillard Serial Founder/Bootstrapper of Video Related Startups. Currently Growing

Last updated on September 18th, 2017

What about the company you made this happen with? Do they have connections with either Angel Investors or VCs they can connect you with? I would think that would make the most sense if this is a possibility so you can leverage that current relationship.

That said, if you start out with investors from the get-go, you aren't going to be in a very good position from the perspective of leverage.

Since you already have everything fleshed out, can you go meet with some potential future customers and try to score some deals tentative on your company getting off the ground so you can have some proof of sales?

Personally, I would try to have some sales under my belt before trying to get ANY investors, and as many as possible. The more you have, the less you will have to give away. At the point you are at now, they could eat your lunch.

Viktor Kompaneyets Investment analyst, consultant & advisor

September 18th, 2017

Usually you can't raise round to spin-off to other company. But, it is possible to talk to your co-founders and find solution. Probably, they will do buyout of your stake in project and earned money can be enough to start new company.

Mahmood Panjwani Entrepreneur-In-Residence, Artiman Ventures

September 18th, 2017

Hello there, You can certainly raise a series A with no revenue provided you have a solid Unique Value Proposition along with the strength of rest of the 6 questions on top of my linked in page (Mahmood Panjwani - Artiman). Happy to help you think this through. MP

Thasneem Masood CoFounder@Rossbelle

September 18th, 2017

If the market accepts the company's product smoothly and if their is a huge market upside for that product, the it does not matter if the company is making profits at the Series A or Series B stage. Best Thasneem Masood Co-Founder (ROSSBELLE) & Regional Coordinator - Fashion Revolution South India


September 18th, 2017

David, having trouble finding you on LinkedIn. Can you share your profile or email address?