Equity distribution · Founder Agreement

Structuring an Equity deal with a Potential Co-Founder

Austin Johnson Free Agent - AustinJohnson.me

October 17th, 2017

Hi All,


I am considering buying into a startup that has achieved initial traction and revenue.


An acquaintance has started a marketing consulting company, which we believe we can scale into a thriving agency.


Presently, the business is at about $7k in MRR (monthly recurring revenue), and has been operating for 5 months.


I want to buy into the company with a small investment (about $3k - $10k), and work full time on the business.


What are the best practices to value this business, and negotiate a co-founder's agreement?


Thank you,


Austin

David M

October 23rd, 2017

My question is why the owner would even let you or anyone else buy in. It would be wiser to take out a loan for $3-10k then give up equity for such a small amount that all signs point to he can fund easily over 2-3 months. Unless he has bad credit, or poorly budgeted his first two quarters and has burned through his operating capital. No upside in such a deal really for the owner other than getting you if you have a skill set the company needs and you want to invest $3-10k just to be nice.


Hard to suggest any meaningful valuation on only 5 months of revenue. If you do no one is going to put much stock in such a valuation anyway. If it were me, I would discuss what I can do for the company, illustrate the value of what I can bring. Maybe it is an account you feel confident you can bring to the table. Aside from setting aside equity for key players you may bring on at a later date, if you are saying you are going to be a major player in building the company then request a substantial piece of equity. I personally would keep the investment out of it. I wouldn't want to position myself one day 5 years from now when the company is making $2M a year to have to have the argument of "I am owed my fair share. I invested $3k in it in the beginning which is part of why I am a cofounder." I would rather my talent and competence which is worth millions be the value that is measured in the deal. In other words, "I will come on as a cofounder. No Im not going to invest $10k in this business. Im going to invest my time and experience and ability which will lead this company to great success and profitability." My ten cents..no wrong or right way...do what you feel is fair.

Jessica Coane Founder of PEX+, the travel search engine for maximizing your miles and points

October 23rd, 2017

Let me put it to you this way: what's in it for the founder for you adding only ~1 month's recurring revenue to the business? Why is that worth much of anything substantial equity-wise?


I agree with David, if the founder needs your skillset then focus your value on the skillset and don't bring the nominal amount of money into it