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What is the best way to structure an investment in my own startup?

While we all have heard of investors bootstrapping, I'm wondering if there is an optimal way to contribute capital to your own startup as well. Specifically, if there are two founders and my co-founder cannot match capital, what is the best way to structure a capital contribution in a way that will not give future investors heartburn? Should that just result in additional equity for the contributing founder, and if so, based on what valuation? Some friends have suggested debt, but I have heard of investors preventing repayment as part of the terms of their new capital. Any insights? Thank you!

20 Replies

Kate Hiscox
2
0
Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
Hi Ray - use Slicing Pie to determine equity. Its a sound and fair model that determines and allocates equity for cash and non cash contributions. ?
Monica Borrell
1
0
Monica Borrell Entrepreneur
CEO and Founder at Cardsmith
I 2nd the slicing pie suggestion. it is so far working great for us!
Ray Sturm
0
0
Ray Sturm Entrepreneur • Advisor
Co-Founder and CEO at AlphaFlow
I'll check it out. Thank you!
Adrian Andrade
0
0
Adrian Andrade Advisor
Creative Director at emPower
What about convertible notes? That form of debt is allowed to convert to equity (at a discount) once you have a valuation via future investors.
Robert Tolmach
3
0
Robert Tolmach Entrepreneur
Entrepreneur and Social Entrepreneur
If a future investor insists on your founder equity vesting, then be sure that any equity arising from this funding is not subject to that provision.
Kate Hiscox
0
0
Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
Even using Slicing Pie, founder equity is subject to vesting. Trying to get around this is fruitless in my opinion. You can grant yourself some perks for sure, partial vesting up front and such but don't go nuts. You'll only create hurdles. ?
Matthew Himelstein
0
0
I love to build teams and solve problems
You might consider the convertible note route with no cap and no discount - but with a provision that states you get the note terms of the next round of financing (if they are better). That way you're not setting the cap or discount - your next set of investors are.
Dan Kaminsky
3
0
Dan Kaminsky Entrepreneur
Executive Producer, Spice DNā, Digital Content Specialist, Video, Web & Social.
We addressed this in our partnership agreement. The value early partners brought to the start-up is key in determining how to manage this. Bootstrapping in the early days may mean sweat equity. As the business gets traction actual cash may be required, as in your case. We predetermined a cash amount that partners would HAVE to match if the businesses truly needed it. Beyond that one partner could infuse a greater amount of cash but would be first in line to get paid back in line with any profits. If the amount of cash becomes considerably sizeable then a deal of some sort would have to be negotiated. Any business should have clear provisions for investment whether by third party or existing partners. If it's good for the business any good partner should be amenable to a fair deal.
Thomas Duffy
0
0
Thomas Duffy Advisor
Telehealth365
that is a tough situation when one partner can put up money i would structure it as a buy in of their % of the business .
Kate Hiscox
0
0
Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
Problem with that Thomas is how do they determine what that percentage is? That is where the slicing pie model comes in to determine that. ?
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