Take it as a redeemable loan with the condition that it will be converted into equity upon closing of your next (first) round of investment. You don't need a lawyer for this, just write it in plain English so everyone can understand.
I agree. Taking an equity investment at a too-high valuation can jeopardize your chances of getting more money down the road. If, as you say, you don't need the cash and you're doing this for the connections, just give them the 0.1% in exchange for their services as a consultant. Taking such a tiny amount of cash for equity will be more trouble than it's worth.
This reminds me of the old joke about the wife asking the husband on whether or not her butt is fat. There is no good answer here and the absolute wrong one is when the husband asks for the definition of fat.
There is no definition of smart versus dumb money that would serve the discussion here.
My observation is that many of the Hacker News readers are first time entrepreneurs and my belief is that it is important that they understand that they don't build companies by relying on VC money (even if it comes from YC). The more they accept that VC money is dumb, the more they will focus on what it takes to build their companies.
I just said that we take VC money when all we need is money.
Which by way is exactly what these gentlemen did? They didn't treat VC money as R&D money but instead they treat them as working capital. They took VC money when they have paying customers and a working business model and it was time to grow the company.
The point that I am trying to make in my own writing (http://www.startupforless.com) is that entrepreneurs should concentrate on building their company with their own money FIRST and when they have a ready product, they can CHOOSE.
On the other hand, there is nothing wrong with the YC model which is to take money early. But YC is an exception, not the rule. And YC money is clearly smart money.
But there are a whole bunch of us who doesn't fit the YC model.
"They took VC money when they have paying customers and a working business model and it was time to grow the company."
Paypal had no idea what their business model was going to be when they took VC (they tried to fight off ebay sellers to begin with), their idea changed every week. They actually raised money so they could buy users (literally, they gave users money if they signed up).
"entrepreneurs should concentrate on building their company with their own money FIRST"
it's precisely because this isn't an option for young founders out of college that something like YC exists. we have no money of our own in the first place so taking external investment is our only option.
It is actually not a VC but more like an adoption agency that takes promising orphans off the street (not based on needs and not based more merits, but based on genetic match) ... feed them and cloth them, then send them off to foster parents (real VC's) who can afford to bring them up properly.
I don't mean to be harsh. And I have great respect for everyone who is involved with YC. And I am certainly not trying to be a sour grape.
For a bootstrapping entrepreneur, VC money is a drug and a distraction. And by calling it "Smart" money, the popular culture is attempting to turn it into a "legalized" drug. This is a really good article and having been in the trenches for many years, I highly recommend it to the YC community. VC money should be dumb, the dumber the better. Only by understanding this assertion, can one focus on what it really takes to build a company ... and it is not about taking VC money. Enjoy.
I agree. I think the article basically summarizes what we have all learned (the hard way) ... ahead of your competitors but never too far ahead of your customers.
This is a fantastic article summarizing what I have learned and what I tried to write on my own (http://www.startupforless.com).
I am humble by it.
Basically it boils down to the following ...
1) Create "value", not "valuation"
2) Be a "surrogate" customer, live their lives and adopt their persona
3) Be frugal, use your VC money as working capital and treat it as the last money you ever going to have and need
4) ... and more
Please don't sign comments, especially with your url. They're already signed with your username. If other users want to learn more about you, they can click on it to see your profile.
Yes, it is the first user conference for the open source network analysis software. Sharkfest is the new name for Ethereal. It will be a great conference, meeting the man himself, my hero, Gerald Combs. And it is in our neighborhood.
This opens up another topic that is equally interesting, which is the relationship between entrepreneurs and risk management.
My observation is that entrepreneurs are NOT risk takers. They are very much risk-averse. This is a strange comment but as an entrepreneur, I differentiate between taking risk and mitigating ambiguity.
I don't gamble and I don't play the lottery. I think doing so would be taking undue risk because I have absolutely no control of the outcome.
On the other hand, doing startup is not risk to me because I believe I can control the outcome. It is just that the outcome is somewhat ambiguous which I know how to mitigate.
I suppose if I take a step back, this is not unlike the difference between an amateur gambler and a professional gambler. If I know how to count cards, I won't think that I am taking risk neither.
