Navigating Investor Demands for More Equity: What Should a Founder Do?

When an investor requests more equity than initially agreed after pitching, this is a complex issue that requires a careful approach. The founders need to understand the reasons behind the request, evaluate the co-founders' contributions, and consider the impact on company dynamics. Ensuring fairness and transparency is essential during this process.

Understanding the Reasons and Impact

The reasons for the investor's request can vary widely. It may be due to the investor's belief in the startup's potential, the risk associated with the investment, or their overall contribution. All these factors should be carefully evaluated before proceeding. The co-founders' contributions play a crucial role in determining the appropriateness of the request.

Seeking Professional Advice

In most cases, it is advisable to seek professional legal or financial advice to fully comprehend the implications and potential consequences of granting additional shares. Professional guidance can help ensure that the founders' interests are protected and that all aspects of the agreement are thoroughly reviewed.

Negotiation and Renegotiation

Negotiations may be necessary to reach a mutually agreeable solution. If the investor's request is deemed unreasonable or outside the scope of the initial agreement, the founders may consider negotiating new terms or exploring alternative investment options. The primary goal should be to protect the best interests of the startup and its founders.

Recognizing Red Flags

There are also instances where recognizing red flags can help avoid problematic situations. For example, if an investor attempts to change the deal just before closing, it can indicate that they may try to do so again whenever they see an opportunity to gain leverage. Starting a business relationship with such investors is not advisable.

Evaluating Fair Share Distribution

The initial equity split plays a critical role in the startup's foundation. If the initial split was not fair, adjustments may be necessary to maintain a balanced and motivated team. Generally, the initial input is minimal compared to the effort and resources generated after the founding. A 50/50 split or something very close to it, considering future contributions, can be fair if co-founders are contributing equally.

Ensuring Equal Effort and Contribution

All co-founders should make equal efforts and contributions to the growth of the business. A situation where one co-founder is working full-time while the other is contributing only part-time can lead to conflicts and inequity. Founders need to feel a sense of fairness and motivation to work hard for the success of the business.

Conclusion

Handling investor demands for more equity requires a balanced approach. Balancing fairness, transparency, and negotiation can help ensure that the startup's foundation remains solid. In cases where negotiations fail, or the investor's behavior is problematic, it may be necessary to seek alternative solutions, such as restructuring the cap table, buying out an unreasonable co-founder, or even starting again.

As a founder, it is essential to prioritize the best interests of the startup and its founders. By seeking professional advice, negotiation, and recognizing red flags, founders can navigate challenging situations and create a strong, equitable startup foundation.