Giving equity away as referral to raise a seed round?

2 points by overworkedasian 12 years ago | 2 comments

so right now, we are currently bootstrapping our startup and we'd like to raise a seed around to help us focus soley on the startup.

Raising money is a pain in the ass, that I get. Some friends have been asking how they can help us raise that seed round. While I would love their help with connecting me to people that are willing to seed us, is it right for us to give our friends equity (small amount) to help us raise a seed round?

The core team is focused on building the product and have been passing up consulting projects to focus 100% time/effort on this project. While I dont mind our friends wanting to connect us to people that have the cash to fund us, I dont know what the best way or best practice is to reward them (if their connection does indeed fund us in some way).

Part of me believes that my friends should be helping me regardless of what I give them while my co-founders think we should be compensating our friends for connecting us with potentially our seed investors.

Thoughts?

stephenp 12 years ago |

It's worth running this by a securities lawyer. A variety of federal and state laws may be at issue. If someone is being paid for making referrals you need to be sure that you (and the referring party) have crossed every t and dotted every i. Sorry for being less than specific -- it is an issue that jumps off the page for me, but I don't know the answer and don't want to lead you astray. A good securities lawyer can tell quickly if this is/isn't an issue that needs to be dealt with in greater detail. My guess is yes, and dealing with the SEC or equivalent state regulator will be even less fun. I am sure someone on HN can give you the name of a trusted legal advisor who will give you a quick gut check if you don't have someone already.

loceng 12 years ago |

I guess it depends really on what they're doing. If they or you are leaning towards on equity being given I would write up a very specific contract that states all of what will be done, and under what circumstances they are awarded equity - how much, etc.. and also probably setup a sliding scale of amount depending on how much they get you. You'll have to decide how much you need and what dictates what amount of equity. It won't only really be a referral - you'll have to provide other information to potential seed investors - so I'd just say put a profile up on AngelList (angel.co) and keep whatever equity - your friend can point people he/she knows to your AngelList profile then.