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Ask YC: Negotiating with Friends/Family/Fools for the first round.

2 points by enki ↗ HN
Hi,

We're about to close a 70K EUR Round with friends (in packages of 10-20K), which we plan to use to test our marketing assumptions, and launching the first city, for a finished product.

Bigger cash seems to be available only with strings attached (e.g. 100k now, 1.5MM later for 40%), and there are few good Angels in Europe.

It's not just hard to pitch, it's much harder to find someone to pitch to.

Our current self-valuation, which we think is very reasonable, even when accounting for interest and risk, is 1.5MM.

How would you guys go for arriving at a valuation with friends?

We're prepared to give them a significant discount, but we'd like to avoid haggling.

Do share your experiences!

8 comments

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rms
What about convertible debt? If you plan on raising more money, this can be good for your early investors, because it's protects them from dilution.
aaroneous
We did a convertible debt round and it was great. No need to haggle over a valuation, and the legal documents are much much shorter, so you can save considerably in those pesky legal fees. I highly recommend this approach.
enki
ok, will look into this.

what kind of discount is usual at this stage? 20%?

rms
Also, your friends said no to your 1.5MM valuation?
enki
nope, but they look at the percentage and 1% for 15.000 feels little.

people aren't used to equity here, so we have a hard time finding people understanding the numbers.

even those that understand, don't like the feel of owning less than 10%.

convertible debt sounds like an option - will have to see if we can find a lawyer that has even heard of it ;)

sharpshoot
There are fewer angels in Europe. Doesn't mean that there are none. I presume enki you are from Germany?
enki
We're in Austria, and we sent out quite a good number of business plans to people. We had about 15 meetings in January. Most of them have never dealt with teams like ours (4 hacker/designers with business experience), nor internet based business.

We even got some offers, but not at conditions acceptable to us. (Sell your soul for 100K and we might give you more cash later)

If you know anyone else we should send it too, please do tell! We're quite open about sharing the business plan. Just mail us at paul@boehm.org.

We think we have a good head start. We're more worried with funding than with copycats right now.

anamax
Giving them a discount devalues their investment and reduces the odds of success.

Why do you want to do that to friends?