Selling 20% Equity for $100k?

Question

Assume a founder sells 20% of their equity for $100k (first investment in the company so it's pre-seed) .And is personally okay with it. What would be wrong with this.I was told by friends that selling 20% of your company for $100k makes it very unattractive for new investors wanting to invest in the company.Are there any experienced founders or investors here that can explain why it is unattractive to invest in a startup that sold 20% equity for $100k in its first round (probably pre-product, pre-MVP)Let's say the business has good fundamentals (traction & cashflow) after the $100k investment.What would make a potential investor pass pass on such a deal?

mchannon · Accepted Answer

Not clear if "potential investor" is the $100K or a future round of investment.
$500k is obscenely low for most companies, but not all. Are you building a lemonade stand?
An old expression is "any fool can sell a dollar for 90 cents." Your willingness to take such a low amount of money for a large amount of equity and control says a lot to future investors, and the news isn't good.
Can I now also invest $400K for the other 80%? (I'd never see it again because with 0% of the company left to sell, you have zero financial reason to stay involved in the company).
In the US, a modern day rule of thumb is $10M post money valuation for your first (seed) stock offering. Most states nudge you toward 10M shares for a corporation, the math is pretty simple for $1 a share.
If you can legally revise that sale to maybe 1% of your equity, or cancel the old corporation and create a brand new one where that money goes into the new one at 1%, it'd be perfectly fine with most investors.

quickthrower2 · Answer

Who did they sell it to? That person is now a cofounder presumably. I guess it complicates the story a bit. Selling means you don't believe in the venture - you are doing the opposite of what you are asking the investor to do!If they sold it to get another expert on board and the 100k went into the company that might be different I suppose.

nprateem · Answer

Startups typically require multiple, increasing rounds of finance. By seeking 20% for only 100k, the company is either incredibly desperate or can't generate enough interest to get a better deal. Worse, it means that the founders are likely to end up with so little equity after, say, 4 rounds that they become demotivated, further increasing the odds of failure.

gnicholas · Answer

Investors want to 10x+ their money, so they&rsquo;ll be very hesitant to put money into a company that is run by someone who sold much of the company for so little. It shows you either need cash or you don&rsquo;t think your company is worth that much. Either way, it signals to them that you&rsquo;ll likely sell out in the future before they get their 10x+.

jacquesm · Answer

You don't want to sell that much equity for such a little bit of money.You should probably look at doing this as a SAFE note or some other form of convertible loan.

joshxyz · Answer

YC gives you $500k + connections for 7%.