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 think I would refuse to do the deal if they refuse to negotiate, though giving them 10% would be acceptable if they were reasonable about the process. Though it's really a bad sign that they proposed such a manipulative deal. I wouldn't want any of these guys on the board or to have a right to invest, because it torpedoes future deals if they don't do a follow-on investment. Lightspeed Summer Grants offers 500k investments to some startups coming through their program, but it's an offer, not an obligation.

But, if the idea was mediocre, no other investor would talk to me, I didn't have a job, I had no marketable skills, I had no place to live, and someone was offering me $25k dollars in check form, I'd probably just start the company and do whatever the VCs said. It's certainly possible that they will run the company well.

If the idea was the next facebook, or already was, I'd make a new post sharing the idea here as a document hosted on my site. At least one person has successfully raised funding by posting their executive summary here (slide deck or YC application would also be fine), I believe they offered to sell 5% for $25,000.

There are more investors out there, some even answer cold emails. Try asking for intros here, there are a lot of powerful lurkers. Or, make something great and wait until the next round of incubators.

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These guys have usernames here and talked to me: http://www.tandementrepreneurs.com/

http://crv.com/quickstart also responded to me.

Also they have the second round defined because they know that $25k will not be enough and they will want to get more shares when you are in situation where you really need the cash.

Though frankly, anyone you'd want as an advisor probably wouldn't want to be on your board for such a small investment, any more than a VC would. In fact, it's very anomalous for board composition even to be specified in such a small deal.

On the whole, smells bad. You might have to take the money at this low valuation if you don't have any other options, but push back about the board.

I've never heard of a true VC fund doing anything like that before. Usually VCs look upon seed rounds (and for them a seed round means $100k minimum) as just a way to generate series A deal flow. So they don't care about the valuation or the board composition. At most they ask for right of first refusal on future rounds over a certain threshold. So it's weird that they seem to be trying to push so hard about such things so early.

I suppose I'd take the deal if it were a super-duper fund like Sequoia or KP. For most startups it would be worth giving them 10% of your co for nothing just to brag that you had them as investors. On the other hand, they'd never do something like this. And the fact that anyone is is ipso facto evidence that they're a bush league firm.

Obviously you can't mention the name here, but if you want to send me an email (my username at ycombinator) I'll talk to you about it privately. I have to deal a lot with VCs, so wildly novel types of VC behavior are very interesting to me.

http://www.hcp.com/summer/, http://www.lightspeedvp.com/summergrants.aspx

For a tiny investment, you are getting an overblown option pool, a 25% ROFR on your next round, and getting an investor leaning board.

When negotiating financing, you have to negotiate. In fact, not negotiating is a sure way of signaling that you don't know what you are doing. What you really want to do is to let the market price it out - you want a minimum of 2-3 term sheets to get a fair market value for it.

An actual, decent VC would just give you $25K as a grant.

I agree with rms that it should be structured as convertible debt.

Push back hard on the board. 10% isn't enough for them to get that much power, and giving that away can make your life very difficult later on.

Generally, rights for the next round are pro-rata. That means the angel has the rights to put in enough money at the new valuation to maintain their position. It's rare to give rights to an angel to increase their percentage that much.

Be sure to have a lawyer look over any term sheets as well. And definitely don't pay any of the investor's legal fees out of your $25k.

My feeling is that this is shady. It's very unusual behavior for a VC to fund a company for so little, or to even want to sit on the board of a tiny company, let alone position themselves to potentially control it.

Common Stock - Just because they're asking for common stock, doesn't mean they can't build additional terms into the investment agreement. The fact that they're asking for a board seat means they want rights beyond what common stock would normally grant them.

Conclusion - Irregardless of whether the ownership percentage is fair, $25k shouldn't be worth your time. Take the two months you'll burn getting this deal done and put it into developing your product. Also, just the least bit of legal shenanigans (and if it's a VC, there will be shenanigans), and you'll have to hire a lawyer which will eat into the $25k.

Now stop screwing around on Hacker News and build your product. ;) Wait until you have a working beta, with users and some press, then go get yourselves a real deal.

start reading :)

1. How far is 25k going to take you? Just to a prototype? A beta version? Basically you have to setup goals and objectives and if this money will help you get there.

2. If you answered to yes to number 1. Then once you get there how much would you value yourself then? Would it have been worth it to give up that % of the company to reach there?

3. What are the criteria for success? Will the VC help you get your next round of funding?

4. What else does the VC bring to the table? Relevant contacts? Better exposure?

You're effectively selling your company for $25k. You no longer own the company if the investors hold two seats on the board to your one (and if they get veto on who the outsider is, they definitely hold two seats).

You are always allowed to negotiate until paper is signed (or until you've shook hands on the deal), but it sounds like these folks are either testing your mettle or just hostile investors. Either way, it seems a little problematic.

http://venturehacks.com/articles/option-pool-shuffle

Cheers, Omfut