I have an opportunity to join a startup with a fairly interesting product idea and I am offered a small percentage of the company in sweat-equity. No salary for the next 9 months as a minimum and I am planning to work full time on that product (no other job for me). Potentially the company starts earning some revenue by the end of the year. What slightly worries me is that during a shareholder agreement discussion the founder casually dropped a phrase about getting his initial investment repaid back when the company starts making money.
I am trying to understand if this is a standard and fair practice? Isn't the initial investment effectively a price for much larger percentage of company ownership and claim to much higher potential reward?
No, but you can't blame the investors for that.
1. As a general rule, the founder should loan the company money and document it as a promissory note. Better yet, get a bank to lend the money and be a guarantor. Secure the loan with a CD if necessary. When an investor comes along and wants the loan waived, let them talk to the bank. LOL
2. As a general rule, the founder should sign an employment agreement (a one-sided one, favoring the founder) with his/her own company to pay him for his/her time. The founder should collect that pay when the company is able to start paying a payroll. Why not?
Neither of these techniques is common.
Certainly everything is negotiable as a prerequisite to an investor making an investment, but why on earth would you start out making concessions prior to starting negotiations?
The founder should not be trying to recoup his initial investment from the company. The only way I know to do this is if the funds were provided as a loan to be repaid or as a convertible note. This would need to be formalized when the funds were given to the company, and this would not be an investment it would be a loan. Its expected that any shareholders will get a return if there is a liquidity event where the company is sold or goes public, its common for outside investors to provide funds as a convertible note but not founders.
An even bigger issue I see is that you will be working unpaid full time for at least 9 months. This is a huge red flag if you are not a co-owner of the business (20%+ equity) and even then you are taking a huge risk. There is a very high likelihood that the company will go out of business within a few years and your equity is worth nothing. This is especially true if they cannot afford to pay you anything (they cant even afford minimum wage?).
Slicing the pie is quite good and logical. If you dig around the author has free excel templates. https://slicingpie.com
Founder from time to time would be taking payments from the company, and investing back into what he love's, and that is his/her business. I believe the company should reward the founder, with all efforts put into it. Before founder proceed to retirement on a firm salary. Diversify the dividends to newer entity.
Rubbish. You're paying the opportunity cost as a technologist not working for 9 months. 9 months market rate for your skills, adjusted for equity, is your investment. Do you recoup that? Jeez.
Brother, there is simply a general difference between an investor and a creditor. I hope your company knows it well.
There are so many ways to do this, it really depends on your goals. Some options include:
1. Make an investment in the company just like any other investor would. You could do anything from a SAFE to a NOTE to a priced round.
2. Rather than not taking a salary, you could defer salary to be paid back or converted to equity once more capital was raised.
3. Do a secondary to recoup your investment from your equity once more capital is raised.
4. Carry your initial investment as debt to be paid back at a future date.
Personally i'm a fan of option 1.