Venture Hacks

Are you going for venture capital or an angel investment? The level of documentation and requirements will be similar, but at the angel level the chips are stacked more in your favor as far as getting meetings and investment. Angels are not going to expect a minimally viable product or traction as much as VCs will.

A few sites to check out:

http://www.venturehacks.com
http://www.markpeterdavis.com/

Every VC is going to be different in what they want and don't want to hear/see. Remember going in that the odds are against you. To increase those odds you can show traction in the market, and at minimum a working product (even if it is not the final product).

Angels and investors are going to want to know about your background (i.e. school, previous work, and any startups you have done in the past).

Essentially it is a dog and pony show where you have to prove to them that you can execute on a product and make a return on their money. While a return is not always going to happen, the more comfortable they are with you, your product, and the chances of making a return on their investment the better off you are.

Get a lawyer, one who is experienced in raising outside investment. There are laws that you must follow when seeking outside investment and having someone familiar with the process is essential. Be ready to spend some money on the lawyer (most lawyers will work with the intent to take their fees off the top of the funding when finalized).

The final thing is it takes…

I would recommend you check out a few sites like:

http://www.venturehacks.com
http://answers.onstartups.com
http://www.bothsidesofthetable.com

To answer your questions directly:

1) You generally tell them how much money you are trying to raise (based on your financial projections). The valuation determines what percentage ownership you end up giving up in exchange for the funding. The total amount you end up with is negotiable.

2) The VC takes a percentage ownership of your company, and generally ends up with a seat on your board, Officer salaries are generally determined by the board. As the founder, you usually specify your salary requirements during the fund raising process....an overly large salary is a red flag and could turn investors off. The total amount of control the investors end up with depends on your specific situation.

3) Usually it is done as one big check. However, it may be split up into 'tranches', which are delivered upon meeting certain milestones.

4) Most startups do end up failing, the investors know the risks associated and factor that in their decisions about what companies to fund. If it fails, it fails. The fact that your company is a separate legal entity protects you from personal liability.

5) Generally investors end up taking a 20%-40% ownership stake in your company per round. If you raise multiple rounds, each new investor takes a new slice of the pie.

I would definitely recommend checking out the sites I linked above to get a much…

I originally started my angel fund as an incubator (The Hit Forge). I quickly moved away because of Adverse Selection - the best entrepreneurs are insanely committed to themselves and their ideas, and rationally or irrationally, don't want to diversify. Since then, I've invested in a lot of companies, including Twitter and Disqus and Heyzap, and am glad that I did so. The Incubator model works as a "search" model (MRL Ventures, Obvious Labs, Ooga) where the Incubator "finds" a company that the principals join, but not as an "investment" model where the incubator survives and keeps spinning out companies. This is true because you can't create or replace entrepreneurs - you can only discover them or be them, but you can't create them.

The other problem with this proposal is that the Internet is extremely competitive. You can't do anything great part-time over the long term. A funded team working full-time has a huge advantage on you.

Of course, giving up control sucks. "Valuation is temporary, control is forever." And a business controlled by VCs too early can't innovate easily. So, either raise money from angels, or learn how to negotiate with Venture capitalists. Check out Nivi and my writings (sorry, shameless plug) at http://www.venturehacks.com.

If you do have a good product with traction and are out raising VC money, ping me and I'd be happy to help you keep control (free!)

It sounds like a terrible deal, but if you need the money you need the money. I'm curious what geographical area you are located in -- you'd never get something like that from a SV VC. Was this a verbal offer made quickly or do you have a term sheet?

These guys are offering a valuation half what YC offers, and they are proposing a board structure that gives them defacto control over the company board and the company. And they aren't YC.

Your response should be "how about convertible debt?" Convertible debt makes a lot more sense than setting up a board of directors that they control and it works out for everyone in the next round.

I would recommend reading http://venturehacks.com in its entirety along with pmarca's relevant blog posts. http://blog.pmarca.com/2007/06/the_truth_about.html, http://blog.pmarca.com/2007/06/the_truth_about_1.html, http://blog.pmarca.com/2007/06/the_truth_about_2.html, and more. After reading pmarca, you should be able to answer the question if you actually want to raise VC money or not. It only makes sense for a very specific type of company.

I'm in a similar situation, and am struggling with the same question. From some desktop research and talking to investors/other startups, it seems like "0.1% - 2% of post-Series A stock" is a reasonable range depending on the results an advisor might bring about.
(http://venturehacks.com/articles/advisors-part-2)

Are you planning to draft a legal agreement of sorts with this person?
If yes, it may be helpful to tie in dollar amounts with milestones to determine equity percentages, I think. Personally I find it hard to quantify how much connections and a couple of hours a week are worth in terms of dollars.
If it's possible to put a revenue amount to what s/he is bringing to the table, either in a strategic "$X in the first N years" or "$X from this release within N years" kind of way, that may help to crystallize the equity percentage somewhat.

Congratulations. You have solved the problem really well.

My biz partner is currently some one I went to school with and a good friend for years, some one I can share my bank account password with.

Connections are important but my personal thought is if you have a great product and achieved the market-fit hiring a professional or an advisor to help is at your disposal. But don't partner if the only asset they bring is connections.

I recommend looking in your circle first, some one you've worked with in the past, understands you really well, shares your vision and trust you.

There is some great advise on http://venturehacks.com/articles/pick-cofounder that might help you.

Good luck with the search.