I hung up the phone Friday afternoon and sighed. I have begun to coach the Newco startup. A world-class VC wants to lead the next round of funding of Newco but there are intellectual property complications and so instead the VC lead now wants to finance the XYZ company. It owns a minority share in Newco but Newco does not own any share of XYZ. There are contracts between the two startups that state who can do what with technology from XYZ. That technology is being invented by Newco engineers who are paid cash by XYZ who then gets the technology rights worldwide licensed to XYZ. Geographical limitations have been contracted from XYZ that restrict Newco from using the technology owned by XYZ for the first product of Newco. However, the second product from Newco is exclusively an invention by Newco engineers. Both companies need cash from a round of financing. The lead VC wants to finance XYZ and trust that the investor's influence will get cash to Newco. But Newco founders want to continue fulfilling their dreams and remain independent of XYZ.
Does that sound complicated? If you said yes, I say you are right and the VCs will agree with you. Avoid such complications and keep your business simple. Before thinking about creating some very close and involved partnerships with other companies, talk to a lawyer who is experienced with VC deals. Unfortunately, Newco only got a great lawyer after the complexities were in place.
I don't know how it will turn out for Newco. But I do know the current sounds of the deal are not encouraging for that startup. That is unfortunate. The founders are superb people and very able. They were just naive entrepreneur when they got started.
BOTTOM LINE: Investors want to put money into companies who own the technology. They want all of it in the company they finance, without any strings or complex contracts and limitations. Keep your startup simple. Get a great lawyer. Respect that the risks are high enough without a mess involving your intellectual property. A simple startup is easier to finance than a complicated one, no matter how tempting the other company is that you might do a strategic partnership with.