Our friend's father took advantage of us

Our board was made up of friends and the two co-founders. We need to recruit some others people before we raised money and wanted someone with fundraising experience.

We interviewed several people and couldn’t find the right person. Then a friend introduced us to his father, a retired banker looking for something interesting to do. We all liked him and offered him the position and some share options. He attended the first board meeting and had some good ideas. He used his network to find us three potential investors. They all seemed nice knew one another. One had a teach background, which would be good for us.

Development work on our app went quickly and there was great market feedback. We needed more money to continue development. Our four new Directors said they would match any institutional investor.

Two days later they introduced us to Dragon Investments. After a lot of hassle they agreed to buy 40% of the company at a $10M valuation. This seemed good since we were only two years old. Once the investment was made, Dragon and the four directors owned 80% of the company.

At the first board meeting they said they wanted a new CEO; I was voted off the board and fired. They paid me six months salary and I kept my options. At the next meeting they fired two more from the original team. They announced that Sunrise Technologies offered to buy the company based on a $12M valuation. The two companies merged.

Six months later we found out that our friend’s father and two of the Directors were also directors of Sunrise. We also learned the merged companies were sold to a third party for $35M.

The second round valuation was lower than the seed round and my parents and friends were upset they lost money

The first round of seed capital for my business came from my parents and friends. It valued the company at $1m, which everyone was happy with. It quickly became obvious that we would need more cash within six months if we continued to grow at the same pace.

We met with Capital Ventures, who seemed interested in investing. We had several meetings and they asked for lots of information. After 8 weeks they said they would invest subject to the approval of their investment committee.

We did not hear back from them for a month. I called them and they said the meeting was postponed but they would get it to the committee within two weeks. Ten weeks passed and cash was getting low - we had less than 3 months left – when we heard that the investment committee had approved the investment and they would let us know the terms once they finished the due diligence. That took four more weeks and we only had a month of cash left.

They came to our office and said they wanted to buy 45% of the company at a $650K valuation and if we met certain benchmarks, they’d buy another 20% at the same valuation.

It was a disappointing offer, but we were out of cash and had to accept the offer. My parents and friends were very upset that they had lost money investing in me.

I don't really understand dilution and how different forms of fundraising and employee compensation work

I don’t really understand dilution and how different forms of fundraising and compensation for employees work. I’ve heard people say equity is the most expensive money, but I’m not really sure what that means. I started the company, so I should own it. I understand that investors want equity, but if I give them too much, it won’t be my company anymore. Even if I never give any investor more than 50%, f I keep needing more money, it won’t be long before I have less than 50%.

I don’t have a ton of cash, so I’d like to pay people with options. How do options dilute me?

My lawyer told me that 20% is usually set aside for options. That means I only own 80% before I get other investors. If I give investors 31% for their investment, I lost control, right?