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Should I bootstrap or take some investment for equity dilution?

I have a business idea in Enterprise Security which is based on client server model. Server will be in cloud while client will be in user mobile as an app. I had created a basic version on android with some screens using Balsamic. Then I discussed the solution with Security Heads of few large companies whom I knew. They are excited and willing to use my services. I have below queries :-

1. Initially I wanted to do it on my own with a known SW firm (Know them since childhood). They did the app for free and are willing to help with development /deployment etc. and willing to accept staggered payments.
2. I have an ex-colleague who is also interested in joining me. He wants 45% stake for all costs shared as 50-50. He will also help in marketing, running the business, etc but not full time as he has his own business to take care of.

I am going to work full time on this. So shall I agree to Pt 2 above or what best offer I can give and how much stake?
I have funds to do the app & roll out on my own and can sustain for 6m-12m wout any addl fiunds.
But I also need someone whom I can trust and know.
So seeking your advice.

Also, Should I first file for patent or just complete the development etc?


5 Replies

Dave Lemley
2
0
Dave Lemley Entrepreneur
Consulting Technologist
re: investor dilution vs bootstrap: this decision is about what kind of business needs you have for your expected growth and time to get to cash flow positive. It sounds like a technology business, it sounds like it will be a while before you will be self-sustaining financially, and it sounds like you have a good amount of development, biz dev, and marketing needs. Probably you will needs investors, and probably VCs. On the other hand, if you have committed customers who are going to pay you (maybe even up-front?), then maybe you don't need it. However, 6-12 months is not a lot of runway, and please do not underestimate how much of your time and effort you will be devoting to fund-raising. Actually, you should get started now, and count yourself lucky that you already have that much runway.

re pt 2 -- it could work, but what is the other 55%? all you? what are you going to use to give to new hires? You need a pool of shares for that. You can do it the way you suggest, but you'll be doing more board-level paperwork more often to create shares for the new hires as-needed. You could (as I have done previously) create, say, 10 MM shares, give yourself 20%, your cofounder 15%, and the rest is pool for new hires. (take those specific numbers with a grain of salt -- but you get the idea, I'm sure). You'll probably need about 2-5% for VP-level hires eventually. And maybe a similar amount for key early employees (e.g. an architect-level position, if you do that). Also, consider the time investment of your co-founder in making that decision on the split; it sounds like they are not going to be 100% on your project?

Certainly at least if you're going to take investors, you are going to need to put everyone on a vesting schedule, including yourself. If your employment agreements (which you will have as well, weird as it might seem) have unusual non-dilution, acceleration, etc, clauses, the investors will make you undo those, so it's best to stick to common industry practices so they'll take you seriously. Anyway, as soon as you issue your and your co-founders options, immediately exercise them all and immediately file your 83b with the IRS. You have 30 days from when you exercise to do this. Also, you'll want to do this now, so there is no 'spread' on the option value (no taxable event), and because your stock will currently have a par value of say 0.0001 $, so the cash outlay to you is trivial.

re: patent -- if you think it is patentable, you do not need to wait until you have completed development. Also, I would file a provisional first, which is cheap and easy, and will give you a year before you have to convert it to a regular application. USPTO is a 'first-to-file' system now. Actually, I'd do that right now. It will be a good story for your investor pitch to have demonstrable IP of some sort.

OK, one last thing in passing: if you're going to pitch to investors, they'll probably want you to be a C-corp. If you're wanting to postpone that for paperwork/tax reasons, then maybe be an S-corp and convert it when you get closer to taking on the investors, but if that event is going to be in the next 6-12 mo, you might consider just doing that (c-corp) now. Maybe.

Good luck, sounds exctiting!
-dave
R. Paul Singh
0
0
R. Paul Singh Advisor
Entrepreneur, Advisor, Get things done
Dave has provided great detailed answer. Some points that I would also like to add:

1) if your partner is only going to work part time then why is he getting 45%? Must be getting much less unless he has some skills that you desperately need. Also everyone in the company should vest their equity and not own it outright for ever - even you!

2) I agree you should be getting ready to pitch investors but at this stage you can get investor interest if any of the following is true:
a) You have prior relationship with the investors or getting recommendation from someone who does?
b) Your technology is so unique and special that any investor looking at it will conclude that it is a once in a lifetime opportunity
c) You have some customer traction even if your product is not complete and that is the most likely scenario
So bottom line you should focus on how to get customer validation and get some good traction before thinking of raising money.





Dave McCarty
0
0
Dave McCarty Entrepreneur
Sales & Marketing Consultant w/ Startup Success
Your business model and particularly your cash flow analysis should help answer your question. I would be focusing on specifically how bringing on your ex-colleague and how that person would specifically accelerate / impact cash flow. Is your colleague's contribution more about cutting costs or bringing in revenue? The Title of your post indicates Bootstrapped vs. Investment, that to me, typically is similar to saying "How soon can I generate enough revenue to be self sustainable (or favorably marketable to future investors) before running out of money", with that said a detailed cash flow analysis is one of your most important tools.

Without much additional info 45% seems very high for a part time investment and at a very minimum the vesting period should consider that.
Marcus Yoder
0
0
Marcus Yoder Advisor
Vice President, Regulated Markets Business Development at Gamblit Gaming, LLC
Sanjay,

One principal I have followed that seems to work is:

If you have the cash, and don't need the cash, then don't take any cash.
If you need the cash, and don't have the cash, then take the cash.

The second portion is critical. When John Doer was asked why some of the companies he invested in failed, his answer was... "they ran out of cash."
Chris Martin
0
0
Chris Martin Advisor
Enterprise Software Sales, Business Consultant, Entrepreneur
I'm sort of in the same boat. I'm considering how and when to take on an equity investor. The only difference is that I have developed my product, created the mobile app, and created have a solid customers base all out of of my own pocket. Now I am out of My Money to continue growing the business. I just don't have the money to continue the R&D to advance the product. I feel like this will be essential taking the next steps and so I'm looking for an equity partner.
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