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Investment help

5 pointsstartmeup117 comments

I'm looking to make my first investment in a start up and am trying to navigate the murky waters.

The site which launched late last year has received a seed investment of 50K pounds, and the founders have invested 30k pounds. They are based in London but are planning to move to Silicon Valley later this year. Is there anything in particular I should be looking at when valuing the business? The current monthly burn rate is 7k pounds. This is paying for 3 salaries and operational costs. They are looking for a seed investment of 500K pounds. They will then hire 3 more engineers (they are ready to go now). The 500K will last 12 months. The post funding valuation is estimated to be 2.5M(USD)

I will be investing around 30K pounds asap. My investment will essentially facilitate the time between now and the 500K seed funding which may take some time. I guess I'm looking for some sort of guide in which to calculate equity share for my investment.

Any thoughts would be much appreciated.

you want the pre funding valuation: post funding is valuation plus investment normally so: $2m and your share of that - 2.25% if I've done my sums right. You could probably ask for a bit more for being willing to take a punt on them raising the 500k funding and hence your risk being higher. You can also dispute the $2m valuation (but obviously if you push it down too much then the 500k round will like your valuation better and you will be diluted more anyway) - given most valuations at this stage are "how long is a piece of string".

If your round and the 500k are very close together the investors for the 500k may expect your terms to be the same as theirs.

also with the best will in the world their plan is just a plan and it won't pan out like that (speaking from very similar experience). Moving to SF is hard and expensive unless they already have visas or are US citizens, raising 500k is hit and miss (especially in the UK) and their hiring plans will take longer than they want.

Also from personal experience (on the other side of the coin ) I would suggest that you will mitigate your risk much better by finding someone else to come in with you now for say 60k which will keep them going much longer than the 4 months you will be buying them - because unless the 500k round is well advanced already 4 months is just long enough to make them desperate when negotiation time comes for the bigger round.

> finding someone else to come in with you now for say 60k

I (strongly) second that.

This has been on my mind also. Thanks for the comments and links - very helpful

Instead of an equity investment, have you considered convertible debt?

The risk with relatively small and early investment from you at a high valuation, is that the startup will need to raise the 500k at a higher valuation at 2.5M pre. What happens if they only can negotiate 1-2M? Your stock value could be cut in half.

Overall, the convertible debt will give everyone more flexibility for raising the 500K round, and since it sounds like its critical, you'd rather not have any restrictions on it.

Convertible debt is looking like the way to go. Does anyone have experience with discounting the equity when the note is converted? I feel like there should be a recognition of the increased risk for early investing. Would a discount of 50% be a restriction in terms of raising the 500k from other investors or is it a pretty standard term?

I honestly don't know how restrictive this would be in practice, but I have heard of plenty of situations with a 50% discount so I don't think its absurd.

You will find plenty to help you here:

http://www.paulgraham.com/articles.html

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