Question: I am about to get my first angel investment, need help on a few topics.
My best friend introduced my to my first angel investors/smart capital. I offered him advisor shares (0.5%) but he also asked me for cash when the money hits the bank.
- Is it ok to give him cash? my first reaction is that I would rather use that cash to grow the company and raise the value of his shares.
- What would an angel investor think if the money he gives us is used partly to pay the person who introduced us?
I need to keep my friendship and protect my startup, please help! Thanks!
To make sure I'm understanding it right: Your best friend wants cash (+ advisor shares) for introducing you to angel investors?
If that's the case:
I don't know what sort of place you're at (in terms of progress, valuation, runway, etc), but to me this is poor behavior on the part of your 'best' friend.
Thanks! I am the idea/mvp stage. I have a fintech startup for sending remittances internationally. I already made a few remittances to get some traction and I recently started the seed round. I am planning to divide the seed round into two, 750k AT A $3MM valuation and another 750k at a $7.5MM post money val. My friend is bringing value in lots of ways (legal, industry knowledge and intros) but specifically in this situation he introduced me to the first angel money, which I closed. The 0.5% for me is ok, I think he has brought enough value in the early stage and will keep on bringing more with time (i will probably have a cliff and vest for him too). What really gets me thinking is the reason why he would want cash.
That's good that he's contributed beyond the intro, and I think ultimately you know best in terms of assigning equity. You should absolutely vest any equity for anyone it's issued to, and investors will ask that your equity vest as well. I sometimes see advisors vest over 2 years rather than the standard 4, but that's up to you.
Now there's two things that could be at play:
Whatever the outcome here, it sounds like there hasn't been a clear conversation between the two of you regarding expectations and associated compensation. You should always lay that out up front, especially when you're dealing with friends or family. I can't emphasize that enough.
Thanks a lot @JDR, I am sitting down with him today to get expectations clear but this advise helps me to prepare for that meeting very well. Cheers!
Did you arrange this before the intro?
If not, nope. Don’t do it. Walk away. It’s very deceptive that this wasn'y discussed up front. Also making an intro is not part of closing the deal.
If you must, then advisors are subjected to a vesting period and they should be actively adding value to the organization.
https://www.cooleygo.com/advice-advisor-option-grants/
Don’t give cash. This is essentially taking oxygen out of your runway and is doing more harm than benefiting your friendship and company by keeping this guy around.
If you decided upon this before the intro, don’t do it again.
http://blog.lawgeex.com/how-a-finders-agreement-could-ruin-your-startups-chances-of-getting-funded/
Thanks @Tobin very much appreciated!
he probably wants cash so that he doesn't have to pay taxes on it. tell him you can only write a check for consulting services to his name and he can cash it at the bank. you should not withdraw cash from your company account and hand him the cash, you need to have a record of where the money went to.
Good insight @darkrussian, will definitely take into account if the negotiation goes that way.
A finder's fee is not non-typical. That said, that's usually understood upfront through a broker. If he wants cash, that works since he can skip the vesting and he becomes liquid immediately, and you save equity for further rounds.
It might be preferential for him on a time-basis, as startups will take anywhere from 5-10 years to reach an exit, if any.
I Understand, thanks a lot @kfrapin, I will have to ask him.
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