Should I invest $100K in a startup for 3% equity? – pre money valuation is $20M

From the sounds of it, they are only asking you to invest so they can turn around and pay you from your investment.

With that in mind, you may want to consider doing a convertible debt and if/when investors come on you have an option to convert to equity or collect what is owed to you. And if the investor does not come through, the company still has a debt to you.

Stock in a company is worthless (literally, as in "worth $0") until 2 things happen: * the company gets sold * the company does an IPO

Those are hard for all kinds of companies but next to impossible for a consulting company.

Consulting companies don't scale they way product companies do.

Revenue of $20k/month is nothing (this is what Google spends on a good engineer per month). They don't make enough to pay you a market rate.

How is this company going to ever get to multi-million dollar a year profit (a condition necessary but far from sufficient for a sale or IPO) ?

You seem to be so pre-occupied with details of the deal that you seem to be missing the obvious thing: investing in this company looks like a terrible idea because there's no way this company is going to be so successful to warrant a sale or IPO.

3% would be a bad deal even for a regular employee considering they don't have money to pay you. If you really want to do it you should ask for 15%+. But please, don't.

Do you even trust these people? Unless we're missing some important information they sound either ignorant or shady.

1. I would ask for my unpaid consulting fees

2. Ask if they want me to join without the 100k down and take less % on shares

The rationale here is:

- Low monthly revenue for a long time

- Not paying contractors is bad

- How many other people have this 'offer' on the table?

If I were to put 100k of my money somewhere, it would be on a 1-year sabbatical and start my own thing.

I would say consider this two separate deals, don't conflate them(!):

1) The investment: You're out $100K and have a fairly risky investment in this company that could be worth $0 one day (and no set payback date). $20m valuation is meaningless, it just helps you vaguely judge risk, but not much (also who did the valuation? How confident are you in them? Who is the 2m investor? Do they even exist?).

2) The full time employment: A full time employment offer, when or if, that happens should be considered on its own merit (although that alone sounds almost like a further investment as I imagine they're going to "under" pay you since you're now a stakeholder, or worse expect free work)

The ultimately question you should be asking is: Can you afford to lose 100K outright? Because that is on the table. Could you put that 100k on black on the roulette wheel, and risk a 50/50 shot of losing it? Or worse on a 1/16 or 1/32 shot. Because that is the reality.

To be honest I'd consider taking a 3%/100K if I could afford to lose (completely) 100K (and the company had good prospects). But I wouldn't work for them below market rates, because then the risk has risen too much, and it sounds like you do pretty well anyway on your consulting.

So if I did the investment I would then go and make money elsewhere, so that even if this company burns to the ground, my maximum liability at that stage is "only" 100K, not a penny more.

Working for them for 50% of normal or worse not getting paid reliably (as now) is just more and more investment and before you know it you might be throwing another 100k or 200K after your initial investment just from lost wages alone. Essentially trapping you into more and more risk.

So look at risking it on the company but curtail the level of risk. You shouldn't be in as deeply as a founder, your potential compensation isn't high enough.

If the contract for this transaction is sound (refer to the "Get An Attorney" section) then you are buying 3% of the company at $3.34mm valuation and, if the seed money comes through at the amount and percentage you state, you have 6x'ed your investment. That's not a bad deal. However, there are some caveats. It all smells fishy.

First, this company has been in business for 3 years or so and they have not seen a profit until last month? Their valuation is effectively $0, especially if they are in the consulting space and not the product space. They have no assets. They make no money. They have essentially no history of being successful. I am not suggesting that they have no hope of becoming successful, just that they currently should not be valued at $3.34MM. That would be 13 times annual gross? No way.

Second, we can extrapolate that they are not worth $20MM. You mention that they were cash positive last month for the first time. Let's say that means they made $35k on a $30k burn. Let's also say they can keep at that level, month over month. At a $20MM valuation they are being valued at 47 times annual gross? No way. The investment firm will learn this quickly as they do their due diligence.

Third, let's look at debt. They aren't paying you. How many other 1099 contractors, vendors, and others are they behind payments on? Do they account that debt and those payments into their $30k monthly burn? I will not speculate, but if you are planning to invest $100k into them, you should know for sure.

If you were going to invest $100k into a company like this, I would suggest a much lower valuation. I would also suggest that you get a board spot. I would not be shy about asking for a stepped up equity position under various circumstances (The other investor doesn't come through? More equity for you. You spend more time working for the company? More equity for you. etc). Say 10% equity for $100k. another 10% if the seed money doesn't come through. X% annually as you help them grow the business over the next 4 years.

Now, if it were me, I would never invest in this deal. $100k is enough to invest in my own successful business without the baggage. I would leave, invest in my own company, and sue them for my unpaid work. But, that's just me.

A consulting business isn't really worth what you are proposing -$300k a year with a valuation of > $1m.

If I am understanding you right, if you invest $100k into the company, they would use that money to just pay back your consulting fees right? Why not have them compensate you outright stock and forgo cash compensation? It seems like a waste of time to put cash into the company and then pull the cash back out.

Also if you are concerned with them not raising the funding you could just make your investment contingent on the raise. Basically say to them "assuming that we can get this round done, I'm in for $100k". As an entrepreneur I hate this (makes me think you are betting against the company) but I could be persuaded if you picked up the axe and charged into battle with me. So make sure that if you do this you are busing ass trying to make the round happen.

The CEO is a serial entrepreneur - he has sold 2 companies to Autodesk and 1 to IBM in the past. He has enabled investors to realize exit profits in the US$180 million range with his founding team member involvement. He is also a highly rated and a well renowned speaker - this is how he gets business. Also, yes - they have been consulting so far but along the way, they have several prototypes developed (to be evolved to full products dependent on funding). I guess thats where the valuation comes in.

Someone1234: I like your idea of not putting all eggs in one basket. I think he did PMV at worthworm.com. Also, the fact that someone is willing to invest $2M - 10 multiple of the seed amount is $20M. Is this how you typically validate the PMV? And yes, one of my incentives to invest is to get myself paid. Is that a good approach?

kkowalczyk : I agree consulting companies cannot scale that much. But, this is positioned to become a product company (dependent on $2M funding) - in that case, what are your thoughts?

Jeffmould: The CEO has confirmed I will be at the top of the stack. Future funding will not dilute my equity. I like your idea of convertible debt to safeguard my investment. In fact, the CEO did mention this to me - he will take this investment as a loan to be returned to me - maybe he meant convertible debt? Is there anything more I should watchout for?

auganov: Thanks for your honest answer. I don't blame you as I left out the relevant details earlier. But how can I ask for 15% for only $100K when Mr. $2M is asking only for 10%?

lxfontes: Yes, if the $2M seed comes through, they have offered me a full time employment with some common stock but without the founder shares. Founder shares will only be given with cash investment.

Option #1 - convert the debt to equity at the proposed valuation.

Option #2 - get paid, don't invest

Option #3 - expect to never get paid - walk away or continue for fun

Don't give those fools money. Working for 2 months without getting paid is enough of a gift.

The $2M is complete bollocks and they need the 100k to keep going until they can find some actual investment. Otherwise they'd be paying your bills.

So tell them you'll consider it once they pay you - and get some kinda signed statement that they do, in fact, owe you for two months consulting.

Frankly, it smells bad and for me that's enough.

You could cut out the middle man and just pay yourself. Anyway 3% isn't a controlling interest and you are entirely dependent on their goodwill in any liquidity event.