Ask HN: Old Investors want free stock in new company - what should I do?

https://news.ycombinator.com/item?id=2036121

by throwaway16 • 16 years ago

12 21 16 years ago

news.ycombinator.com

I had a startup in the past that didn't work out. I had some angel investors who each invested about $20k. Now I do a new startup that is going really well and those old investors tell me that the right thing to do for me would be to give them some stock from my common for free. I really like them and am grateful for all they did for me in the past but I'm not sure if this is a common and right thing to do for founders/past investors or if they want to take advantage of me.

The new startup has nothing to do with the old. New idea. New team. New everything.

I dont mind the shares. I just want to be sure that this is normal behavior and common practice.

If someone has experience as founder / investor / lawyer with this kind of situation please help!

I could REALLY need some advice! Thanks

geoffw8• 16 years ago

No. They took on the risk of the investment, thats why they got the price they got.

TamDenholm• 16 years ago

I've no idea if this is normal behaviour but i highly doubt it. They should realise that sometimes investments dont work out and thats what happens.

If you're open to it then allow them to invest in your new company, but dont give them it for free and dont discount it either, otherwise you're letting yourself get taken advantage of.

kgrin• 16 years ago

Short answer: no. This is what distinguishes an investment in a limited liability business (LLC, Corp) from, well, indentured servitude.

I'm assuming their investment in startup #1 was made freely and without deception - they took a risk, like many other investors in many other startups, and it didn't pan out. Had it, they presumably would have enjoyed a return commensurate with the risk. Anyone investing in startups (or any high-risk vehicle) should be aware of... well, risk. Assuming everything was above board, they knew what they were getting into, and you don't owe them anything more than your best efforts in that venture.

Now, all that is not to say that you should be a jerk about it. You certainly should recognize the relationship, personal and professional and, say, let them join any investment round in the new startup.

Bottom line: if they want to actually get involved in this venture, it wouldn't be out of line to give them an opportunity to do so, perhaps on slightly favorable terms. But if they just want something for nothing - I call shenanigans.

_0ffh• 16 years ago

I am pretty sure that this is not how it is supposed to work. OTOH you might want to give me some stock for the good advise... =)

OmarTv• 16 years ago

You dont need anyone whos been a founder /investor/layer (altough im one of those three) dont let them pressure you. If they didnt invest on this new idea thers no way they should have the right to ask you for that

throwaway16• 16 years ago

Just to clarify - they never pressured me. They just said that this is common practice and would be a good way for me to keep the good relationship going.

I also offered them to invest in the new company and they want to do it. But they feel like getting some shares from my common on top would be only fair

kondro• 16 years ago

This is definitely not common practice. It's not even uncommon practice.

Most small-scale investors ($20k is small scale) usually can't afford to invest in start-ups that they are active founders in themselves and are usually bitter when the company fails because they don't see the failure as their fault (they didn't do anything after all).

Having said that, if they want to invest more in you, feel free to take their money... after all, they know what they're getting in to.

However, don't let personal guilt drive your decision to offer them more stock than is reasonable or make you feel obligated to give them something for nothing. Start ups fail all the time and, by the sounds of this second go around, it may have been no-ones fault that the first one failed - some ideas just don't work in practice.

dkokelley3• 16 years ago

Have a look at goodwill (http://en.wikipedia.org/wiki/Goodwill_(accounting)*).

Have there been any investments in your new venture? Anything that could help set a valuation? If you wanted to give* them equity, understand that it is an arms-length transaction on your balance sheet, not a freebie.

If you really want to, you could give them a 'goodwill' deal. No shares for free on top, but if they wanted to invest, they could invest on favorable (and quantifiably so) terms.

While this isn't legal advice, I don't believe you have any obligation to include your previous investors at all, much less provide them with favorable (or one-sided) investing terms, unless of course there were special terms dictated in whatever contract you previously had with them. If that is the case, definitely get in touch with an appropriate lawyer to keep yourself protected.

dkokelley3• 16 years ago

My syntax was skewed. Here is the real link: http://en.wikipedia.org/wiki/Goodwill_(accounting)

neworbit• 16 years ago

If you like them well enough, offer them some sort of early stage special deal - but only if they invest. But if they didn't pony up further for your previous venture and let it die, I'd be inclined to say "Sorry, guys, you already buried that investment."

steveklabnik• 16 years ago

Here's the correct response:

LOLOLOLOLOLOLOLOL

You may want to be slightly more polite to their face.

thrill• 16 years ago

I've seen people offer the right of first refusal to old investors - i.e. they get the first chance to decline any investment at the initial price (assuming price will increase for later rounds)

tlrobinson• 16 years ago

I've never heard of anything like that. Not common or normal as far as I know.

If you like them and think their advice/connections/whatever would be valuable you could bring them on as advisors and compensate them with an appropriate amount of stock.

But considering they're asking for free stock and telling you it's "normal" I'd be wary of their advice...

dkokelley3• 16 years ago

How was the old venture terminated? Was there an LLC or corporation that was dissolved? I'm concerned that the previous investors might claim that although this is a new idea and new team, the company is the same. How was each venture established legally?

anamax• 16 years ago

> I had some angel investors who each invested about $20k. Now I do a new startup that is going really well and those old investors tell me that the right thing to do for me would be to give them some stock from my common for free.

Would they have been willing to have their previous investment diluted on the same terms?

They'll respond that they're not asking new investors for stock, that they're asking you, but ....

mahmud• 16 years ago

I, personally, would give them something before they even asked. Not because I am required to, but because I want them around me longer.

The people who believed in you when you were less capable and poorer are the ones you want around you when things are better.

I am still friends with the guy who gave me my first $100 as a programmer, more than 13 years ago.

babeKnuth2• 16 years ago

Nice try "Old investor" in throwaway16's original company. We know it's you.

teyc• 16 years ago

It is never ever about the money.

Offer them a small bonus, but not at full 20k value.

If these are experienced investors and you want them around, let them know you value them, but as much as you want to give them a bonus, you want them to know that they realize you value the relationship more than the bonus you are able to offer, as a "recognition" and "thank you" for continuing to have faith in you.

Tell them you don't care whether this is the norm or not. But you prefer that it is not the norm, because you want them to feel good about this, and not because it is an entitlement.

Then apologize that you couldn't offer more.

joshu• 16 years ago

This is not common practice. And it's pretty uncool. Note that while I am an angel investor (...) I am in Silicon Valley, where things can be different from the rest of the world.

Out of the 40ish startups I have invested in, the half-dozen or so VCs I am in an LP in, and the hundreds more startups I merely interact with, I've never heard of anything like this happen.

You giving them common out of your own pocket is also probably difficult from a tax POV. Consult an accountant/lawyer/etc.

On the other hand, the losses from the previous startup do give them a tax offset, so it's not like they walked away entirely empty-handed.

You can make an advisory board and grant them some options that vest over time if they are going to contribute (as they think they are going to, if they think they want to keep the relationship open.) But these guys sound uncool and I would just avoid them in the future.

My gut says, however, no.

(BTW this is where a good lawyer comes in - they can tell you what is normal in the industry.)

kls• 16 years ago

Here is my take on it, if it was your idea and they invested in it they gave you a shot they intended to make money off of their money and your sweat, it did not work out and that is that you have no obligation to them. You both took a risk and it did not work out. That being said, they gave you the capital to take a shot and there are a lot of people that would be very grateful to get that shot.

So it is really contextual, where these guys scraping up their savings and the rent to give you the shot if so they took a bigger risk in investing in your idea than a guy that has several million lying around in the bank. To me that would affect my decision on the subject.

At another level it is kind of strange that they feel entitled to revenue from a new venture with new people who had no commitment to them. It is totally independent other than the fact that you are involved.

For me, if someone bet it all on me by scraping together what they could and I made it on a separate venture, I would try to restore them to where they where before they made an investment in me. Now that is just me, there is no right or wrong here. If it was a professional investor that knew the risk I would tell them to fly a kite. Finally, I would not give them stock if you are doing well and can spare the cash I would pay them back their investment and not a penny more. They have no entitlement to any gain that this company has produces and it actually robs someone that did take a chance on this go round of rewards. Because quite honestly, one of the others like a first employee is far more deserving of those shares than someone who took a chance on an independent venture.

So for me, if the investment was made by someone who took a big risk I would pay them back what they invested, no more. They are not entitled to it and should be extremely thankful for even that.

babeKnuth2• 16 years ago

Return the favor: Ask them for free money for your new company.

Ask HN: Old Investors want free stock in new company - what should I do?

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