Byte Me: Why you need to be very careful when choosing co-founders

http://www.riverfronttimes.com/2011-07-07/news/secureaxis-kalishman-elbring-network-security/

by geekfactor • 15 years ago

47 35 15 years ago

joshu5• 15 years ago

> He agreed to start a company with Elbring and invest an initial $500,000 through his trust — in installments, to ensure certain benchmarks were reached.

This kind of offer is generally a warning sign, btw.

imjk• 15 years ago

Could you elaborate?

themechanic2• 15 years ago

josh, can you elaborate please?

shareme• 15 years ago

I think Josh meant that there was an initial expectation not met to be satisfied through an installment investment once the benchmark was reached..

Generally you do not confuse investments as co-founder with loans..its a bad sign..

geekfactor2• 15 years ago

Josh may have something entirely different in mind but it is a bit of a red flag when an investor wants to tranche a small investment.

Part of the art of sizing your round is to do so in a such a way as to give you a nice bit of running room, but it's much harder to run if you always have to wonder whether there's a brick wall around the corner.

The investor is taking a certain amount of risk in making the investment. The way to minimize that investment is to support the team, make intros, execute, etc. Not dole out the cash a bit at a time like a crack dealer.

Also, the milestones are already built into the process. The seed round provides enough cash to get you past the first set of milestones. The series A enough to get you past the second. Etc.

joshu5• 15 years ago

No, you were correct.

(BTW: Joshua)

brokentone• 15 years ago

Perhaps you could elaborate?

joshu5• 15 years ago

It's generally a sign of a skittish, controlling, amateur investor. You see it pretty rarely.

The investment already is tranched: Seed, Series A, Series B, etc.

tptacek4• 15 years ago

Warning sign maybe, but I've had enough conversations about tranched offers to think it's not uncommon, even among real VCs.

joshu5• 15 years ago

I'm in 50ish startups and I haven't heard of a single tranched investment. One startup I talked to several years ago had a tranched offer but it was from a Known Crazy Person.

I do think there's some pretty big regional differences in investors, so maybe that is it?

gallerytungsten• 15 years ago

re: warning signs

I agree. For those asking how it could go wrong, a brief hypothetical example. Let's say you have a 500k seed round, with 100k initially, then 100k after each of 4 milestones.

If the investor is out to pull a fast one, they might make their equity acquisition immediate (all of it) while you get the money in tranches. Then, let's say they decide you haven't met the first milestone. You're running out of cash. They suggest re-negotiating the terms. Since you "didn't meet" the milestone, it's a down round this time. Maybe they wind up with a controlling interest.

Or let's say you find that scenario coming and find another investor. They might have a liquidation preference so they get paid more; and perhaps first too. Plenty of snares can be constructed by investors who want to take advantage.

tptacek4• 15 years ago

A year in prison for owing $24,000 in back taxes for a couple years sounds extremely severe. I mean, any criminal conviction at all for owing $24,000 to the IRS sounds extremely severe, but I get the circumstance of the plea deal. Still, though.

OstiaAntica• 15 years ago

The prison time wasn't for back taxes, it was that he didn't file at all for the foreign company. Frankly 3 months isn't enough for tax cheating.

tptacek4• 15 years ago

My guess is most people who owe back taxes haven't filed. It's not "tax cheating" not to file; it's "tax cheating" to file false returns.

I went a bunch of years without filing, racked up a pretty significant tax liability, and it was absolutely not a big deal to take care of it.

Years earlier, I did the same thing, but instead of having my accountant clear it up, the government noticed and just levied me. Again: not a big deal.

geekfactor2• 15 years ago

Like many who post here, I've often thought it would be cool to be able to go to a "Founder Match" type of site to identify possible co-founders.

What's interesting to me is that at once, this article speaks both to why a site like this SHOULD NEVER exist (you should really know your co-founder) but also why it REALLY MUST exist (some kind of reputation score could have helped here).

redthrowaway2• 15 years ago

I could see someone like pg starting it as a sort of HN-like venture, with no expectation of making money aside from making YC more prominent, but I can't see it as a startup. How much would you have to charge in order to be profitable? How big is your actual market? I just think it's a potentially useful service that would be very difficult to build a company on.

spinlock2• 15 years ago

At first blush, I'd say you have a very serious problem that you're trying to solve. That's always a good place for a startup to begin. In this one example, millions of dollars were lost and one founder did time in jail and is hundreds of thousands in debt. Hind-sight being 20/20, I'm sure these guys would pay $10k to avoid this mess (not to mention going after the potential upside of doing this business right).

The risk that I see is that the problem is a latent problem (i.e. one that founders are not aware of) rather than a realized problem. So, the people who understand your value proposition are already ruined and don't have the cash to pay you and the ones who have the cash and need your service don't know that they need your service.

vaksel• 15 years ago

1. Jail over 24K in back taxes? That's insane

2. Getting sentenced to a medium security prison? I mean really, this is a big wtf...should have been light security...or better yet just house arrest

spinlock2• 15 years ago

Also, why you need to be very careful when filing tax returns. A good accountant is a god-send.

ahi2• 15 years ago

I don't really disagree, but in any other circumstance $24k in back taxes won't see the inside of a courtroom let alone lead to jail time. The IRS will typically just send a bill with some penalties and interest tacked on. The US Attorney realized he got pulled into the middle of a clusterfuck a little late and Elbring paid the price for pissing off well-connected people.

tomkarlo2• 15 years ago

Peripherally related: one thing I've learned is to never partner on a web site with someone who doesn't have a lot (and I mean dozens, if not hundreds) of people connected to him via sites such as LinkedIn or Facebook. If someone's claiming to have been working on Internet projects for years, and can't immediately point to a hundred or more people who are least willing to connect with them on Linkedin or something, there's something deeply fishy.

A great question someone once told me for talking to a potential business partner: "Who were your past business partners, and can I chat with them? Also, how well did they do relative to you on those deals?" If someone tells you that all his past business associates were crooks or liars, walk away.

lsc• 15 years ago

now, I agree completely with your second paragraph. However, as for the first? the problem is that the more 'connections' you have on social networking sites, the more likely you just click 'accept' to all requests. A huge number of my customers, for example, request to be a contact. I mean, I guess that's somewhat legitimate, but if you pointed me at one of those random people without access to my customer database? I wouldn't be able to tell you who they were. I mean, I've had about 4000 customers (I mean, I don't currently have that many, but over the last five years or so, I've had about 4000.) So, I think < 100 contacts is fine, if the person is one of those folks who limits contacts to people they actually know and remember.

tomkarlo2• 15 years ago

If someone's been in the industry for a decade (and wants to be an entrepreneur), or went to school less than 10 years ago, I'd be hard pressed to believe there's less than 100 people they know and remember who would want to connect via LinkedIn, etc. I'm a pretty crappy networker and I don't add connections on FB or LI to people I don't know, and I've still got over 1,000.... I don't think 100 is much to ask. And I'm not saying it's a dealbreaker, just something that might mean you should investigate further.

(To give a more concrete example, I once realized that someone claimed to have gone to a particular college, but didn't have a single person on either FB or LinkedIn from that school in their friend lists. Doesn't that seem a bit fishy?)

Vivtek5• 15 years ago

I can't even read this. It radiates tawdriness.

ahi2• 15 years ago

May this article give the attorneys at Lewis Rice many headaches. If I'm general counsel with a relationship to Lewis Rice I think I'd be looking for outside counsel that wasn't going to sell me out when I'm a little inconvenient.

Byte Me: Why you need to be *very* careful when choosing co-founders

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Byte Me: Why you need to be very careful when choosing co-founders