Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at firstname.lastname@example.org.
Q. We just got a good deal to raise money at a good valuation. We need cash for expansion, but the investor wants more shares than I’m willing to sell. I don’t want to dilute my ownership. What do I do?
–Cofounder of an e-commerce company
Congrats on the deal.
Now, you have to find a way to make it a win-win for everybody.
While you don’t want to sell your shares, it’s possible that if offered the opportunity, some of your early investors and/or employees may be willing to sell some of their shares for liquidity at this stage. Angel investors are often weighing when they want to take some of their money off the table or let it ride. And there are a variety of reasons why cashing out could be helpful for some employees. In many cases, employees at startups are being paid below market salaries and bonuses, and the cost of living is high. Furthermore, a big payout might not be on the horizon as it’s taking longer for companies to have exits. Taking a small amount off the table makes sense for some people. If so, such an opportunity will give them necessary liquidity or comfort, provide the buyer the shares they desire, and you don’t have to dilute your ownership beyond what you are willing to do.
Q. I’ve been offered $50K to join an incubator. It’s a four-month program that targets companies like mine, and it would help me with market strategy and positioning, which I need. We need the money, though we have taken steps to give us more runway (my cofounder and I aren’t getting paid and the team is deferring salary). But the deal structure is steep: For that $50k they want 5% of the company and the ability to invest a larger amount in the next round.
–Founder of a B2B company
I am a fan of expanding networks and access to capital. That being said, I feel like these terms are quite onerous. I would ask if there is room to negotiate–this happens with incubators sometimes. If not, I think I would lean toward passing as I am not sure the capital they give or the program and exposure they provide is valuable enough to justify these terms.
Yes, the go-to market help and forcing function would be helpful, and the additional capital is nice, but the price is steep. If it were me, I’d pass–and work hard to get a few customers with recurring revenue and go heads-down on a plan to get to a no-brainer seed round.