Founders started another company to produce their second product instead of diluting their equity in the first.
Many entrepreneurs try mightily to hold on to as much stock as they can for as long as possible. But if you've already sold close to half of your equity to pay for the development of your first product, and you need to bankroll the next one, what do you do? Dave Wilson Sr. and his son, Dave junior, found an answer last winter: set up a second company.
The duo had started their original company, Swearless Tool, in 1991. To complete the design on their first product (a wrench for use in heavy manufacturing) and to ready it for production, the Wilsons, based in Boulder, Colo., had raised around $500,000 from 45 friends and contacts. Everything was on track to begin marketing the product last winter when they came up with prototype wrench number two. (This one was aimed at the communications-equipment industry.)
The Wilsons figured they needed an extra $300,000 to get the new prototype to production. However, selling more stock would have further diluted the founders' interest to less than 50%. "The day you're out of control is the day you leave," says Dave senior. They eventually opted to set up a new company -- Dynamic Aerospace Tools Co. -- with its own shareholders.
Twelve investors bought 25% of its stock for $300,000. (Several are also Swearless shareholders.) The two companies, which operate out of the same office and employ five people between them, have annual revenues of less than $1 million each, says Dave senior. "Our hope is to build up the businesses, then sell them so that our investors can make some money."