My good friend has a startup in the grocery space. They have pitched a number of VCs but have only received interest from a few. One firm offered to lead the round but under the condition that they would allow the VCs to put an outside investor on the board. I know my friend doesn’t want this but their seed funding is running out and they need capital ASAP. She feels that if she says no that the investor will pull out of the deal and they might not be able to raise any money this year, putting the company at stake. How would you advise her to deal with this investor?
She has two choices... hold out or take the offer.
It is good that they want a member on the board (as long as their not paid a wage) because they fear loosing their money.
The whole investment world was hugely damaged by people who took overly large investment funds or simply didn't have the business management skill to get the company to break even and turn a profit.
If they put a member on the board then it can only be a good thing... unless of course your friend has values beliefs or ideals that are a blocker toward pure Capitalism.
When you say... seed funding is running out... how did this happen? why is seed fund running out and are they not breaking even?? are they taking a wage? - if so.. stop. Are they working evenings and weekends (basically 24/7) if not, why not??
Have they been economical with their funds or overzealous?
Why would the company fail if you don't get an investor? if the seed investment had been given to you in the old method e.g. via a bank... would the bank have forced you to go bankrupt by now?
Basically... remember that this money that you're receiving is from other people, that they have worked long and hard to make that money and they want to see a return on their investment. Of course there is a group of people who didn't work hard for the money but either way... think twice and think hard before your friend risks their money for the sake of having a guiding member on your board.
What is her concern? If done correctly the outside investor will provide insight and perspective. A boards job is to advise and direct and if you have all of the same types of people on your board then even if they are 100% loyal they wont be driving the company forward.