One of the recurring problems we see with Latin American startups at Magma Partners is founders with too little equity. In the past two weeks, I’ve seen three cases where the full time founding team has 7%, 10% and 25% ownership after only one round of fundraising. Two companies had raised less than $100k, one had raised ~$200k. When we see companies with this structure, we tell the founders directly that it makes their company uninvestable. It’s especially true if the founders think they’ll need to raise even more money in the future, or plan to move to the United States. Every company is different, but founders should have at least ~70% at this stage, or even more if they plan to compete on the world stage.
We see five common causes:
- No Vesting – Cofounders who have left own significant equity
- “Part time cofounders” – People who aren’t full time who own significant equity
- “Advisors” – Companies with large numbers of “advisors” or “advisors” with significant of equity
- Unsophisticated investors – Raising money from people who view startup investing like investing in private equity or small businesses
- Investor Malice
Let’s unpack each one.