I have a pre-revenue startup, valued around 2M (self assessed valuation).

An investor (that already has his own company in the field) wants to buy the 51% of the startup, but i don’t think this is good for me.

I cannot withstand two jobs so i actually want this to go on. The startup won’t live without me as a Cto (i am the cto) because of the particular knowhow and history. The other members will keep having two jobs, for me is just impossible…

He still didn’t come with a valuation, but he said that want to delay the payments in the next months… he also wants us to help him with his current company, becoming its r&d department and make our business as startup.

I asked if i will be hired by his company, but he told me that he will just invest in the startup and what we do with the money is up to us… but of course if i am hired by my startup, lots of cash flow will be negative just for my salary and i cannot afford to be unpaid.

What should i do? How can i have better conditions? What should i look at? I know maybe you will need other details, please ask.

Thank you for answers

    • SaltMaker23@alien.topBEnglish
      1·
      1 year ago

      You have two cases:

      1. Investing
      2. Acquihire

      In case of investing, you leave your job and work for your company until it works or bankrupt, in other words you go “all in”

      In case of acqui-hire which is the more likely scenario you are facing this is the standard situation:

      1. Acquiring company is looking for exceptional talents that are able to build the products they want to build internal
      2. They look for startups with good products in their same industry, the focus will usually be around the technology and know-how it’ll never be about your business as they don’t care at all.
      3. You’ll get a good valuation but usually goes between 100k$ to 1M$ per founder. Ebida will skew that to higher values but they won’t go acquihiring high revenue companies, it just won’t make sense.
      4. They’ll propose to buy the company and have you working part time in the “parent” company and part time in your “startup” but you are going to be hired by the parent company.
        1. They might even to tell you that you’ll go fulltime in the parent company and they’ll find a replacement for you in the startup branch
      5. A earnout
        1. Minimum duration you are commited to work for a given salary and can’t resign
        2. They’ll try to get a earnout as long as possible, it’s limited by law to 5 year iirc, but usually 2-3 years.
        3. The salary for your earnout duration is where you have the leeway to ask because this whlole thing is to hire you guys, you can ask way more than standard employees.
        4. You should go for 1.5-2x the monthly price of a senior in your industry, target the salaries of very high level managers, for a dev in belgium is 8k€-10k€ for a senior, in BE you should aim for at least 15k€ in earnout salary
      6. The sale of your company might be of the form that they pay in 3 times 1M$, where the first paiment is given at 333k$ and the 2 remaining will depend on the performance on the company after purchase, so it’ll usually be 500k-700k$ total
        1. you have very little leverage in here as your company without you is worth almost nothing, so this is just the money they have to “pre-pay” in order to hire you.
        2. EBIDA should be added with a reasonable multiple: x3-x20 depending on your industy, salaries for typical people of your profiles should be subtracted from ebida which usually makes this metric useless for startups
        3. Product technology, you can valuation the technoloy by the number of Man Months (time x people x correcting_factor[<1] ) x Monthly Cost of Man, this will give you a rought estimate of how much your current tech stack/product is worth on its own without your customers>
        4. if you have employees of high value, you can also levarge them but usually for a small premium in the valuation so don’t bother with it if it’s an acqui-hire
      7. Next after the sale, your product is going to be 99% scrapper or put on the side, it was never the objective to make it grow, it was to get you guys onboard the parent company.
        1. This is sometimes painful for founders that invested 4-5 years into a product they loved and watch it die in a year progressively.

      Overall your two main leverages will be:

      1. Duration of earnout
      2. Commitment level to parent company

      The discussion is always in multiple steps, where they might misguide into wrong directions to steer down your confidence:

      1. Pretend they want to take majority stake in your company because they only take 51%+
      2. Radio silence when you start discussing
      3. Start the discussion with things different and proposing a loan format instead of investment
      4. You go on and present your number tech and the overall company especially the people behind it
      5. The make a stupid offer where you get 20k€/month each as salary for the parent company and scrap your side business
        1. You can already accept here and forget about your startup if you really are interested
      6. Radio silence as you want them to buy-in
      7. They comeback with an offer for 100% now, and this time it’s what I described in the standard situation

      I hope this explanation will help you navigate through your opportunities

      ps: This is likely my longuest reddit comment ever