There are many other sources of business funding for Start-ups, such as key advisers and technical / IT people undertaking a “sweat equity” arrangement (an investment of their time rather than in cash). In DST corporate we do this frequently to help new ideas, new businesses and new companies launch and grow.
One of the tricky issues in Start-up funding is valuation. It can be complex and challenging to have a “team” agree on the basics for a valuation. How do you value the existing goodwill (if any) of the business? How do you value the time committed by the creator / innovator in the really hard idea-to-plan and plan-to-a-team stage? How do you achieve agreement between the passionate entrepreneur who sees the vision and ‘sweat equity’ providers who have committed their time and taken considerable risk, largely based on the entrepreneur’s vision? How do you determine the value of the time spent – was it is useful, was something of value learnt or was it a total waste of time?
Be careful if you offer someone, say, 10% “if you help me through this phase”. Did you mean that it would be dilutive like all the rest of the equity including yours? Or might they believe that they have, say 10% non-dilutive. If you need to continually offer equity the gap can be substantial. The issue here is what were your intentions and how long does it stay 10% before it becomes diluted by subsequent issues. We have had to assist many owners to “manage expectations” like these due to the lack of clear terms and conditions.
At DST corporate we have developed a process based on more than 20 years of mediating these situations and ensuring there is clarity and openness, together with an opportunity for everyone to say there piece. This takes the “sting” out of these discussions, leads to far fewer shareholder battles and thus keeps morale up, especially during the really tough times.