> He agreed to start a company with Elbring and invest an initial $500,000 through his trust — in installments, to ensure certain benchmarks were reached.
This kind of offer is generally a warning sign, btw.
This kind of offer is generally a warning sign, btw.
Part of the art of sizing your round is to do so in a such a way as to give you a nice bit of running room, but it's much harder to run if you always have to wonder whether there's a brick wall around the corner.
The investor is taking a certain amount of risk in making the investment. The way to minimize that investment is to support the team, make intros, execute, etc. Not dole out the cash a bit at a time like a crack dealer.
Also, the milestones are already built into the process. The seed round provides enough cash to get you past the first set of milestones. The series A enough to get you past the second. Etc.
(BTW: Joshua)
I agree. For those asking how it could go wrong, a brief hypothetical example. Let's say you have a 500k seed round, with 100k initially, then 100k after each of 4 milestones.
If the investor is out to pull a fast one, they might make their equity acquisition immediate (all of it) while you get the money in tranches. Then, let's say they decide you haven't met the first milestone. You're running out of cash. They suggest re-negotiating the terms. Since you "didn't meet" the milestone, it's a down round this time. Maybe they wind up with a controlling interest.
Or let's say you find that scenario coming and find another investor. They might have a liquidation preference so they get paid more; and perhaps first too. Plenty of snares can be constructed by investors who want to take advantage.
I do think there's some pretty big regional differences in investors, so maybe that is it?
The investment already is tranched: Seed, Series A, Series B, etc.
Generally you do not confuse investments as co-founder with loans..its a bad sign..