4 ms·

If i was an investor, i'd see it as a red flag indeed. I'd think: 'so this guy left the boat being a founder, giving up most of his share, so probably he knows

If i was an investor, i'd see it as a red flag indeed. I'd think: 'so this guy left the boat being a founder, giving up most of his share, so probably he knows that the company is going to tank and don't want to waste his time anymore, and he definitely knows a lot more about it than i could potentially know being an outside guy'.

angersock 9y ago
Good thing you're not an investor then, yeah?
empath75 9y ago
Or you might think that he got in over his head and decided to step aside and let the other guys manage the business.
- greglindahl 9y ago
  Still a huge red flag.
- SkyMarshal 9y ago
  That rarely happens. In that case the incentive is actually to stay on, let your co-founders drive the value, and pocket the equity/$ for it. Easy money. Takes a rare breed to self-sacrifice for the good of the company. It's more likely what annovikov said, the one leaving has serious doubts about the strategy but got out-voted.
  - derefr 9y ago
    What is the self-sacrifice in this case? You're trading "working to build a business to earn an equity-stake" for "free-riding on others' work to build said business to make your equity-stake more valuable." Think of it as two separate companies: Startup A, which you co-founded, and which ended up dissolving, you seeing nothing for your efforts (other than whatever salary you managed to scrape out); and then, Startup B, which you bought a huge number of shares of for the amazing price of $0/share, and now get to smile as those shares appreciate, like any investor. It just so happens that Startup A and Startup B are the same company at different points in their life, but that shouldn't change your views toward the two situations.
inputcoffee 9y ago
This is a different question though. This would be a red flag whether he accepted 33%, 10% or 5%. The question is, is the flag "more red" if he has a higher percentage.
austenallred 9y ago
It's not just about the signaling, it's about very practical realities that come to light when you need to use that equity. If I were an investor and I saw 33% of shares with a former co-founder I'd walk immediately. If I were an investor that saw 33% of shares with a former co-founder and then 25% gone in an initial $500k raise I would run, not walk. There's just not enough equity left to incentivize, create an options pool, hire, raise future rounds, etc. It is a Huge red flag, and the likelihood of success decreases dramatically. I tried to raise once with 28% of the company being gone from our seed round, and it was a major, major concern. If this company ever needed to raise again, they'd be dead in the water. Therefore, the founder ends up with 33% of nothing instead of, say, 5-10% of something, and it's in his or her own best interest to take a smaller piece. Now 5%? Maybe 10%? That stings, but at least it leaves the company something to work with.
- angus-prune 9y ago
  You've done this, and I haven't. But I thought you just diluted every round - so that 28% would end up as 21% if you sold a further 25% of the company.
  - austenallred 9y ago
    Yes there's dilution, but ~50% of the company being gone after a couple million dollars raised is not a good thing
danieltillett 9y ago
I do a bit of angel investing and I would run not walk from any deal with a background like this. When the only people with any deep understanding of the business disagree flashing red sign number 1. When the company has 33% dead weight equity flashing red sign number 2.

angersock 9y ago

Good thing you're not an investor then, yeah?

empath75 9y ago

Or you might think that he got in over his head and decided to step aside and let the other guys manage the business.

greglindahl 9y ago
Still a huge red flag.
SkyMarshal 9y ago
That rarely happens. In that case the incentive is actually to stay on, let your co-founders drive the value, and pocket the equity/$ for it. Easy money. Takes a rare breed to self-sacrifice for the good of the company. It's more likely what annovikov said, the one leaving has serious doubts about the strategy but got out-voted.
- derefr 9y ago
  What is the self-sacrifice in this case? You're trading "working to build a business to earn an equity-stake" for "free-riding on others' work to build said business to make your equity-stake more valuable." Think of it as two separate companies: Startup A, which you co-founded, and which ended up dissolving, you seeing nothing for your efforts (other than whatever salary you managed to scrape out); and then, Startup B, which you bought a huge number of shares of for the amazing price of $0/share, and now get to smile as those shares appreciate, like any investor. It just so happens that Startup A and Startup B are the same company at different points in their life, but that shouldn't change your views toward the two situations.

inputcoffee 9y ago

This is a different question though. This would be a red flag whether he accepted 33%, 10% or 5%. The question is, is the flag "more red" if he has a higher percentage.

austenallred 9y ago

It's not just about the signaling, it's about very practical realities that come to light when you need to use that equity. If I were an investor and I saw 33% of shares with a former co-founder I'd walk immediately. If I were an investor that saw 33% of shares with a former co-founder and then 25% gone in an initial $500k raise I would run, not walk. There's just not enough equity left to incentivize, create an options pool, hire, raise future rounds, etc. It is a Huge red flag, and the likelihood of success decreases dramatically. I tried to raise once with 28% of the company being gone from our seed round, and it was a major, major concern. If this company ever needed to raise again, they'd be dead in the water. Therefore, the founder ends up with 33% of nothing instead of, say, 5-10% of something, and it's in his or her own best interest to take a smaller piece. Now 5%? Maybe 10%? That stings, but at least it leaves the company something to work with.

angus-prune 9y ago
You've done this, and I haven't. But I thought you just diluted every round - so that 28% would end up as 21% if you sold a further 25% of the company.
- austenallred 9y ago
  Yes there's dilution, but ~50% of the company being gone after a couple million dollars raised is not a good thing

danieltillett 9y ago

I do a bit of angel investing and I would run not walk from any deal with a background like this. When the only people with any deep understanding of the business disagree flashing red sign number 1. When the company has 33% dead weight equity flashing red sign number 2.