Ask HN: Restructure during financing round | Hacker News Reader

Ask HN: Restructure during financing round

5 pointsrjett2 comments

We have VCs interested in doing a round of investment in our company. My co-founder still holds on to a sizable chunk of equity, but in the last two years has become of less importance to the company. One of the stipulations for investment is a restructuring of the existing cap table to make sure the right people are incentivized going forward. Since my partner and I (the other two cofounders) have all of our worth tied up in the company, we have no means to buy out our third partners, so the restructure would have to take place via the VC deal. In theory, everyone participating in the deal is on board with this idea. In practicality, I'm having a hard time finding precedent. For anyone who has experience in M&A, what's the best way to accomplish this goal?

This is a question for your lawyer, but you'll probably want to replace the more typical "Issue X new preferred shares to the VCs" with "Issue Y new preferred shares to the VCs and, additionally, effect a secondary sale of Z shares of founders stock to the VCs in exchange for monetary consideration of $N with said shares to be converted into preferred stock on completion of the transfer."

Playing with the numbers gets you virtually any combination you guys want of:

+ money injected into the company + money transferred to your cofounder to buy him out + resulting remaining cofounder diluted ownership of the company + resulting VC ownership of the company

Those numbers will probably be subject to contentious and highly consequential negotiation. Again, run it by your lawyer and, if you have them, other advisors that you'd routinely tap to discuss cap tables.

patio11 is right: this is a question for your attorney.

For everyone else, this is a perfect example of an irony many entrepreneurs face today: some investors won't consider investing in a startup with only one founder, but co-founder relationships can create all sorts of problems that sour (or even kill) deals.

Mark Suster had some great advice about co-founders at a Startup Grind talk last month. http://youtu.be/oAHgGUFjK3c

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