Put Your Skin in the Game

Posted by: Rod Kurtz on November 16, 2005

Make sure you have a large amount of “skin in the game.” Venture capitalists hesitate to invest in companies in which the founders have not sunk a lot of their own money, beyond the unpaid time and talent. The reasoning: “If he/she won’t invest in the company, why should I?”

Marilyn Holt
CEO
Holt Capital
Seattle

Reader Comments

Vivek Wadhwa

November 7, 2005 5:28 PM

Marilyn, investing along with VC's is the worst mistake than an entrepreneur can make. Founders typically get stock that is subordinated to the investors and they lose critical leverage when negotiating future financings.

What happens is that the investment by the entreprenur becomes leverage that VC's can use against them. And for the VC's it muddies the water when having to decide on management changes.

Corporate governance in such startups is already weak to start with. What you are advocating creates "alliances" and incentives to weaken this further.

Rami Eskola

February 2, 2006 8:29 AM

There must be a reasonable compromise solution. VCs need entrepreneurs and their ideas and entrepreneurs need investors who are willing to take substantial capital risks. Both share an intrest: the success of the business and getting some financial reward out of it. The question is, how to share risks and (potential) profits?

Let's assume that an entrepreneur (E) has a business idea that needs 10M$ to implement and has potential to generate annual profit so high, that the firm would be worth 50M$ in two years. The $10M is well beyond E's reach and he/she is capable of getting only $100K to invest at maximum.

The very idea of E to put the $100K (1% of the total investment) in the company is - as Marilyn pointed out - to show commmitment to the investors. As more money is invested to the company along the way, the E:s share of the company will shrink to negligible. How will E get a reasonable share of the profit? My proposition is carefully designed options. With options, E can get nice reward if the enterprise scores big time. If the project is long, it woud be wise to reward the key personnel with options tied to intermediate milestones.


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How much exactly 'is nice reward' is totally different subject. Founders have a tendency to price their ideas too high. They tend to compare the price of CV money to bank loans which are totally different things.

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