Too Many Investors in the Kitchen
I saw a deal this week with a startup that had over 150 individual investors. Now to be fair, this is not really a “startup” in the traditional sense. The company had been around for several years, closed several rounds of funding, and undergone two major management and board changes.
Still, this is extreme to say the least. The whole thing just feels incredibly…crowded. When you have so many investors, it introduces too much complexity in the ownership structure and decision making process. It takes time and energy from the founder’s / management team’s ability to focus on executing the business. There is no amount of financial engineering of equity stakes that one can muster to bring this ship into order other than a major buyout of all outstanding shares.
Do not let yourself get to this state in your fund raising efforts. While it is tempting to take any amount of funding, if you are raising $500K, people writing $5,000 checks is not going to get the job done. Better to find a lead investor willing to take a major (30%+) stake of your round. Also, put a minimum cap on individual investments (anywhere from $15K to $50K is usual) so that you do not get a ton of small checks.
The ideal state is to not have so many investors that the whole dynamic becomes unwieldy. Usually a roster of 5 to 15 investors is manageable in a seed round. So if you take $500K as the round with a $25K minimum in and a lead investor that takes a 40% of the round (or $200K), then you need at least 12 investors willing to put up the minimum.
Keep your house in order and make sure you are not simply taking any and all checks. Too many investors may sound like a good problem to have, but could lead to a lot of unintended headaches down the road.
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- marksbirch posted this
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