[danshapiro]

This is exceptionally bad advice. 90% of startups fail, give or take. By far the most likely outcome is that you will be selling this company for less than you put in to it. If you do not give preferred shares to the founder who actually invested, then that person will not be first in line to get their money back.

Example: Alice puts in $250k. Alice and Bob split the company 60/40, common shares. After a year, there's $100k left in the bank, and Alice and Bob decide to call it quits. At this point, Bob leaves with $40k. If Alice had preferred shares, she would get more of her money back.

But even preferred shares are a terrible idea. The right thing is to give the founder a convertible note. That means the founder has debt if the company folds early (and gets his/her money back), and if the company raises a financing round, they just convert on those terms in to the same preferred shares as the subsequent investors.

[lsc]

>But even preferred shares are a terrible idea. The right thing is to give the founder a convertible note. That means the founder has debt if the company folds early (and gets his/her money back), and if the company raises a financing round, they just convert on those terms in to the same preferred shares as the subsequent investors.

This seems like an elegant solution to the problem. So these convertible notes pay interest, right? is this generally fairly high interest? I mean, if I were to ask a bank for a loan without a personal co-sign,[1] they would charge me a pretty hefty rate if they looked at me at all.

At least for my company, even upon success the chance of an investment round is... small, so I imagine the people buying those convertible notes would still want some upside.

[1] I'm assuming these convertible notes are corporate debt, not personal debt backed by the founders

[klochner]

Do 90% give up with $100k in the bank without taking additional funding rounds?

I see the benefit of the convertible note from the investing founder's standpoint, and I appreciate the violence of your disagreement, but you've misaligned the founders' incentives - the investing founder would be more likely to throw in the towel and get her money back.

Obviously the equation changes if the founder is investing $1M, but in the $10k-$50k range (which I'm guessing is a lot closer to the actual number than your $250k example) I'm not as convinced that the investing founder should get preferred or convertible notes.

[dtby]

90% of startups fail, give or take.

You're going to need either a much firmer definition of startup or a much more defined range to make this have even the slightest bit of credibility.