18 months old startup within the mobile advertising space (App install business) is planning its first round of funding. Startup has reach a point where it has: 1) a fully develop product/platform (beyond MVP); 2) 10-12clients willing to tryout beta product and become customers, 3 of them already within the integration process; 3) a management team that includes 3 co-founders with meaningful entrepreneurial experience in the sector; and 4) a big market potential (Startup is initially focus on LatinAmerica and US hispanics audiences - 600M mobile users). The company has no revenues but a clear path to it, including a proven business model.
This startup project was born as part of an Innovation Lab Initiative within Company B. Company B promoted the 3 co-founders to lead this project. Therefore,Company B has been funding the project to date, investing around 800K over the last 18 months. Funds have been mainly used to: 1) develop MVP; 2) build and support a team; and 3) Marketing activities -online presence, Marketing materials, a couple of trade shows to measure demand and capture an initial group of customers.
Company B is not in the position to continue to fund the project and it wants to spin it off to raise outside capital, however Company B wants to retain part of the equity to benefit from a potential upside. Co-funders agree with the idea and want to secure equity before the spin-off. Two outside groups of investors have shown genuine interest in the project and want to invest 250K each, for a total of 500K round. Funds will be used to ramp up marketing efforts, generate some revenue and show traction to have a successful Series A round down the road.
As company B discuss the spin-off with the 3 Co-Founders, the following questions arise:
How should the capital structure look like after the spin-off?How much equity should have Company B? How much for the Co-founders?What is the range of valuation for a startup like this? How much equity should the new investors get for 500K? or should this round be structure as a convertible note?