Is this a common thing? I've got some friends looking to raise a seed round for a B2B small biz product with 50 paying customers, and the deals they're getting offered make my stomach turn.

One party offered them < $300k for a 50% stake in the company.

and? they have 50 paying customers. I'm within 10% of two thousand customers, and my business, realistically, is only worth about $300K in total. (Now, I'm not going to sell it for less than about 3x that, but $300K would be it's fair market value based on the industry standard revenue multiplier.)

I mean, yeah, if you aren't poor, $300K is not enough to give up your dream if you have big plans for the company; I'm going to keep trying for better, and I encourage others to do the same. But you need to realize that for most companies without traction? $300K is a lot more than it's worth to someone not emotionally invested in the thing.

In reality, it's often quite difficult to get more than a years worth of revenue for a company. There is no reason to feel insulted at that kind of offer, even if you do need to turn it down.

Perhaps they should do YC W2012? $170k on great terms with huge value add, and then introduction to top-tier investors, seems like a slam dunk.

This seems like a case where naming a bad actor is worthwhile, although probably not a safe choice for someone like Brad Feld.

The article mentions $25-$100k for 1-2% is sketchy. With a startup, what percentage of ownership should the co-founders expect to give up at the seed stage? At other stages? Any insight would be great.

That's the exact thing I wanted to ask. 2% for 100k is a 5M valuation, that's pretty good for most early-stage startups. Why would this vest over time? It sounds like a clear-cut "quid pro quo" to me...

Not 1%-2% outright; 1%-2% extra over the equity bought.

Oh, now it makes sense, thank you.

I wouldn't fix too much on particular numbers. If the increased probability of success (you take the investment for a reason, right?) makes up for the lesser share then the offer is good. I believe this piece of advice comes from Paul Graham. Edit: Right, here it is: http://paulgraham.com/equity.html

I hijacked your question a bit, so I'll reiterate adw's answer below: He means 1-2% extra for finding the investors.

No worries. I'm still curious as to how much someone should expect to give up, though.

Well, that depends solely on you and your valuation, which, in turn, depends on many things.

As I understand it, it mostly depends on your ability to convince investors that you have a good idea that you can execute well.

Thank you very much for posting this. Learning that good advice/mentorship > bad money (VCs like the one in this article). Budding startups inevitably need funding to survive but it is more important that young entrepreneurs reach out for valuable advice/mentorship e.g. startup incubator programs like YC etc.

First Time poster; Chiming in to also say thanks for posting this article. I'm just starting to delve into this world and the memory of having read this article should prove to be critical were I to run into a situation like this. At the least I'll know to call a mentor to ask about the kosherness of such terms. Again, Thanks!

read the comments too, many people have chimed in with other examples.

I've been sitting on this complaint for a while now. It is really, really starting to annoy me that comments on a webpage rely on JavaScript hosted by some other website.

I use NoScript for a reason. I temporarily whitelist pages which I (after a quick glance), deem trustworthy. I have been known to whitelist Disqus on occasion, but I'd rather not. In this particular case there were a whole slew of external domains that were blacklisted, there's just no way I am going to enable them one by one to see which ones are needed for a few user comments to load.

I know, it's my loss. But I suspect that website owners would have an interest in showing off all the good comments their users post. I'm probably a minority, but using NoScript instead of all the adblockers out there makes me feel like I'm a "friendly user" to website owners. I will see their ad's as long as they don't depend on external JavaScript. There might be a tiny niche market here (ad-network with reliable stats hosted without external dependencies), but I wonder if it'd be worth going after.

On a tangent: I'm just waiting for the day when GitHub will hit me with something nasty, since I have them fully whitelisted.

Maybe I should have written a blog entry instead.

Is the consensus that charging equity for introductions is okay when you call yourself an incubator but abusive when an individual does it?

I don't think that was the point of the article. I read it rather as pointing out that posing as a founder when actually just buying equity is not ok. The key difference is personal engagement ('I asked two questions. The first was “is he going to be full time with the company” and the other was “do you want him as a third full time partner.” The answer was no and no.'.)

No. If an incubator wanted equity but wasn't offering capital, they wouldn't get many applications.

If I told a YC-caliber startup that I'd give them $18k for 6% but wouldn't be able to make any introductions, then they'd probably tell me to take a flying leap. So, effectively, some part of a YC-like incubator's equity take is compensation for introductions.

great post - thanks Brad Feld = respect