Ask HN: Potential investor wants to partner for equity

[RichardDL]

We are in an unusual situation where a potential angel investor wants to become a temp partner. We are a pre-seed recruitment AI tech startup and he has been a CEO and director for the last decade in one of the biggest recruitment firms in the world. He recently quit that job and now he is exploring things and would be willing to work with us for ~9 months. He would connect and sell the app to people in his network. He wants to help us grow quickly for about 9-12 months. Afterwards, he would be happy to step away and move on to something else. For our next meeting, we would need to come up with some options/proposals for equity and expectations.

We are thinking that he could be a great asset in terms of credibility, and connections and help with bringing in other investors. He also wants to put some money and lead other angel investors.

What are some things that we should be wary of? What should we consider before signing anything? How not to get screwed here?

[mchannon]

Had a similar situation a couple decades ago that blew up in my face. Here are the countermeasures I should have insisted upon:

1. No deal is too good to walk away from. As soon as I smelled something, I should've said, "Thanks but no thanks."

2. You run a straight Delaware C corporation, not an LLC. If there's preferred stock the investor gets none of it. Use a boilerplate vesting schedule that lets you cut the investor loose if they turn toxic.

3. You retain access to the corporate checkbook. If investor balks, run away from the deal screaming.

4. If your investor has a change of heart (or health event, or divorce, or drug problem) in the next 9 months, it will be harder to raise money without his full buy-in than without his involvement at all. "Why isn't so-and-so putting in any of his money for this next round?"

[RichardDL]

I especially like the point number 4. A lot of our plan would be hinging on him. And if things go wrong, it would be super painful and difficult to recover.

He wants to be a lead investor too. He just wants to be more than just an angel investor and help us. So we are thinking of taking some of the investment for X% and then suggesting a vesting schedule based on ARR. Like the e1g said in the comment below. 2% for every 100k ARR up to 10%

[e1g]

This deal makes sense if it's connected to revenue, not tenure.

If the contract is framed around time, then understand that you'll be just one of many hobbies for a newly retired exec who wants to feel young and important by dabbling in startups. Those nine months can go by quickly with minimal part-time participation, and then you'll have dead weight on your cap table.

A better alternative is to base their earned equity on milestones - for the next 12 months, every $100k ARR they directly bring in earns them 2% of the company, up to 10%. If they play golf while you grow the business, they get nothing. If they are a killer and bring $500k in ARR, you'll have your GTM, raise a strong Seed round at a valuation of $15-$20M, and they'll get their 10% (less the shared dillution of the Seed round).

[RichardDL]

That's a great way to put it. It makes a lot of sense. Exactly what you said there must be an incentive for him to do the work and we need a way to measure it. Thank you very much for the insights! This is super helpful. I'm not sure how he will see this, but I think it's a good option to put on a table.

[codegeek]

Get a lawyer involved and make sure any equity has a Vesting Period regardless of who the person is. 9-12 months is ambitious and most startups fail anyway. Not to demoralize you but keep that in mind.

[RichardDL]

Yep, we were thinking the same thing. vesting period. Also need to think about what happens afterwards. does he have a seat on the board, how actively is he involved, any expectations etc

[curious_curios]

The main thing I’d be wary of is the fact that 9-12 months is not a long time in the startup world. Are you sure you’re going to have product-market fit and have a mature enough product to actually sell in that time? There’s a reason why vesting schedules are ~4 years.

What happens when he leaves and suddenly your metrics plateau because he was the only one selling the platform? Is he going to bring in and train a revenue organization in that time too?

[RichardDL]

Those are great points to consider. What happens afterwards. Thank you

To give more context, we have a product with few paying customers, 1k MMR. We have been building for 1 year now. Far from product market fit. The sales have been a lot slower than expected so far.

[mtmail]

Apart from investing ask about his motivations. Possible he wants a regular pay-check and health insurance for example. I met an investor (in Europe) who invested in a startup in exchange for a seat in the office while only working part-time.

[RichardDL]

you are right, getting to the bottom of his intentions/motivations is crucial here.

[mmdesignsldn2]

Are you looking for app development partners to build the MVP?

[romerocarlos]

Hiring a temporary partner with extensive industry experience and connections can be a great opportunity for a pre-seed startup, however, there are several important considerations to keep in mind.

Carefully consider how much capital to offer based on the value the angel investor will provide in the short term, and structure an agreement reviewed by a qualified startup attorney to protect your interests. Do not sign anything without fully understanding the terms and implications. Good luck.

[RichardDL]

Great points, thank you very much!

[brudgers]

What are some things that we should be wary of?

Lack of long term commitment.

It makes for a misalignment of interests.

For example, leaving your company and reentering the market as a competitor.

Or keeping leads on the side for their future company.

Think about how your company will be able to make sales once the salesperson leaves.

Good luck.

[RichardDL]

Yep, you are right, we are hoping that he would bring someone in to replace him afterwards. Or at least help us find someone. And with equity he would be invested into making this a success

[brudgers]

Hoping is not a plan.