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Negotiating with Investors: Advice Needed
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freudling
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Apr 9, 2011, 03:48 AM
 
So we're negotiating with investors who want to invest in a new business we're starting.

My partner and I have several thousand hours each of sweat equity in... I've got about 33% cash invested in relation to what they're initially pumping in.

I took a big risk a while back getting this thing going. Now it's less risky because things are fleshed out. We have the beginnings of a prototype.

These guys are now interested in jumping in.

Only thing, they want a majority of the business that will stagnant lower when we show some profits.

I really am not keen giving up a majority here, based on the valuation right now, they're initial investment is no where near a majority stake.

Any advice?
     
Doc HM
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Apr 9, 2011, 04:16 AM
 
Do you have agreement on the current valuation? It sounds like not. If they do then the % share is obvious from the sum involved and the valuation. Sounds like they value the business currently at less than you do. Until you can agree on a current value you won't get anywhere with an agreement on % shares.
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freudling  (op)
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Apr 9, 2011, 07:52 AM
 
Doc HM:

I see. I wish I could post more info... but let's put it this way, the amount they are proposing to put in is really not very much at all. That's the problem I have. When everything is added up, there is no way what they are wanting to initially invest adds up to a majority stake.

So let's just assume the valuation is realistic... very realistic. It's not much really. And with that, their amount just doesn't add up to majority stake. They are saying they want that in the beginning because of the risk involved in investing.

Well, if they are risk averse, they shouldn't invest period. It won't make a difference in the end I can assure them getting a majority stake... it will actually increase risk because it will piss people off here and the motivation toward the business will be less for starters.
     
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Apr 9, 2011, 12:11 PM
 
Sounds like you've already made your mind up.
The new Mac Pro has up to 30 MB of cache inside the processor itself. That's more than the HD in my first Mac. Somehow I'm still running out of space.
     
Waragainstsleep
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Apr 9, 2011, 12:41 PM
 
You do not state how you have arrived at your valuation.

A business with no assets is essentially worthless. Assets can include property, cash, orders from customers, stock and patents. Thats pretty much it I think.
While your hours are worth something to you, they are worthless until you start selling your product or at least getting orders from people you know can pay. Same goes for your R&D money (I'm guessing thats what you spent your cash on?). People have wasted billions developing useless products that will never sell. Likewise on products that perhaps could have sold but didn't for whatever reason.
If your prototype has legal protection, then the company value is essentially the value of that patents or whatever protection you have on it. I'm massively generalising here of course.
There are many other variables to consider. If the amount of money being offered is small, then their ability to deliver that money is presumably not in question. Are these experienced investors or is it a couple of guys you met in a bar after the won some cash on a horse race?
Professional investors don't really take risks. Not good ones anyway. Check out a UK TV show called Dragon's Den. Might give you some good tips.
What are you going to spend the cash on? If its going on further development, it is a big risk. If you want more cash or to hand over less equity, then you need to protect the product yourself and get some orders. Either one or two big orders from big, well-known customers, or lots of 'tester' from as many well-known customers as possible. That is what will give you negotiating power.

If you need the cash before you can get to that stage, then you might well have little choice.
If it really is a small amount of money and a good product, then you should have no trouble finding other willing investors. Give them figure either how much you want for a majority stake or how big a stake they can have for the cash you require.
I have plenty of more important things to do, if only I could bring myself to do them....
     
turtle777
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Apr 9, 2011, 12:42 PM
 
How about a small business loan, some startup business grant or something ?

If that "investor" only brings money to the table *and little at that), it doesn't seem to be the best choice.

-t
     
turtle777
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Apr 9, 2011, 12:55 PM
 
Oh, also, I don't understand why you can't give some more details about the product / service.

If anybody could steal it after you describe it in a few sentences, your "sweat equity" indeed might not be worth as much as you think.

-t
     
torsoboy
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Apr 9, 2011, 02:12 PM
 
I also agree that you are most likely valuing your company too highly. The investors know what the current value of your company is, or they wouldn't be investing. Right now all you have is "the beginnings of a prototype", which isn't worth anything at all. No orders, no sales, no history, no value. Like was mentioned before, if you have a patent on something, they may be investing on the patent alone. You are lucky they are willing to lower their ownership stake as you make money, most would not do that.

If you dislike your investors, you probably shouldn't be getting into business with them. Especially not allowing them control of your company. It will result in nothing but trouble for you. Either you get different investors, or you adjust your way of thinking to be more along the lines of theirs.

The television show Shark Tank is the US version of UK's Dragon's Den... it is available on Hulu if you are interested.
     
Waragainstsleep
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Apr 9, 2011, 03:42 PM
 
Also, if they only want majority stake until you start making money, I see no issue giving away control (and responsibility) of a company with no assets not making any profits. If you end up in debt, you'll be glad of that. Depends how low their stake goes afterwards I guess.
I have plenty of more important things to do, if only I could bring myself to do them....
     
finboy
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Apr 9, 2011, 04:06 PM
 
Originally Posted by freudling View Post
So we're negotiating with investors who want to invest in a new business we're starting.

Only thing, they want a majority of the business that will stagnant lower when we show some profits.

Any advice?
You really need to bring in an attorney and probably a valuation consultant (a local finance professor or venture capital person) and have them do a comparative value analysis.

The investors are probably looking at the intellectual property from your business. Is it something that could be franchised? Is it a unique idea that can be patented or trade/system marked? They may be looking at the long-term possibilities there.

Does your business throw off untraceable cash? That may be a hook too.
     
freudling  (op)
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Apr 9, 2011, 05:12 PM
 
Ok, some good comments.

Let me give you more information. But I'm not going to get into specific details, I just don't want to post that here.

1. No, we don't have sales yet. However, we do have letters of intent from big players.

2. We had a valuation done. I actually divided it by 5 to get the current one. That is how low I am valuing it in relation to how much they are investing. And even with the amount they are investing, it is still maybe 30% of what the lowered valuation is. Who are they? They don't have any background in the industry in question. How did they come up with their investment figure? Not based on the valuation, but based on what it will cost to finish the project.

3. IP. We have some IP, and we have done a lot of R&D. Sorry, I don't agree. Sweat Equity is worth money if there really is potential to sell on the market. We have demonstrated interest and commitments. We put the feelers out first to gauge the market.

4. I have already been on the TV show Dragon's Den/Sharks Tank. I did it for exposure. The amount offered to me by one of the investors was several times more than these investors for less equity stake. "Why didn't you take the offer from the TV show then?" Because I didn't feel that investor would really help our business in the long run. I still feel that way and am glad we didn't go that route. Please don't focus on this point about the TV show.

I'm just looking for advice about how to negotiate with these guys. I'm willing to change my thinking a bit. And thanks to everyone so far because there has been some good advice here.
     
Waragainstsleep
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Apr 9, 2011, 06:20 PM
 
I probably wouldn't agree too much either if it were my sweat I was valuing but I have watched quite a few episodes of Dragon's Den with a total of maybe 8 different 'Dragons' and they all say the same thing over and over on that subject. These guys have brought thousands of products to market and made tens of millions selling them so you have to say they know what they are talking about better than you or I.

That said, it can depend on the type of labour involved. It boils down to how easily, quickly or cheaply an established competitor could replicate that work and how much being first to market matters with your product. This is key. If your product can be easily copied, then all your work so far is basically worth nothing. There are people with armies of staff who can do any amount of legwork needed in no time flat and it gets done by people who are on the payroll already so the cost is essentially zero to them. That is all I meant, I wouldn't belittle your work or effort at all. If you have a patent on "The motor car" then your work is valuable. If you have a patent on "A new type of engine for use in motor vehicles" it can be slightly modified and therefore copied more than likely. I hope thats a good enough example of what I mean.
If you are improving on an existing best seller, than speed is not such an issue. If you are inventing something new altogether, then speed matters big time.
If you have already detailed your product on TV, then anyone wishing to copy it has already had some time to get started. Also, it seems pointless trying to hide it from us since its already in the public domain.

How much are they offering to lower their stake once the money is coming in? Would their investment be enough to get the product onto shelves? Is time a factor?

You say you don't know too much about their backgrounds, but you turned down more money for a lower stake already because you didn't think that investor had the necessary experience/skills/contacts to help you as much as you'd like.

Is it just cash you want from your investors? It sounds like you want more.

If I were in your place, I would be looking at borrowing enough cash to finish a prototype and get a final cost price per unit. That is what you need to start taking pre-orders. Then you get the pre-orders, then you have some serious negotiating clout with your potential investors.
I have plenty of more important things to do, if only I could bring myself to do them....
     
Phileas
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Apr 9, 2011, 06:48 PM
 
Sweat Equity has no financial value. Ideas have no financial value. A company without sales has no financial value. Entrepreneurs don't like to hear this, but it's the truth. Note that I learned this lesson the hard way myself, when I started my first business. I am not trying to belittle you, your ideas and your hard work.

I don't know how much money you need, have you considered kickstarter? I am supporting a number of projects right now.
     
turtle777
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Apr 9, 2011, 07:37 PM
 
From all I hear, this investor might not be the right one for you.

They have no exposure to the industry, but want a majority in the business ? Red flag.
Willing to pay only "what they can" ? Red flag.

-t
     
freudling  (op)
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Apr 9, 2011, 07:57 PM
 
I don't agree. Sorry. It's not easy to get a team of people experienced in one area, who have done thousands of hours of R&D... sweat equity is valuable. If you don't think so, then fine, but I wouldn't be interested in working with you then.

Second, what makes you think the episode aired on TV? As a matter of fact, it didn't air. They film 300 pitches, and air only 200. We weren't aired, so no, it's not in the public domain.
     
freudling  (op)
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Apr 9, 2011, 08:00 PM
 
Originally Posted by Phileas View Post
Sweat Equity has no financial value. Ideas have no financial value. A company without sales has no financial value. Entrepreneurs don't like to hear this, but it's the truth. Note that I learned this lesson the hard way myself, when I started my first business. I am not trying to belittle you, your ideas and your hard work.

I don't know how much money you need, have you considered kickstarter? I am supporting a number of projects right now.
This is complete nonsense and couldn't be further from the truth. I am thinking of two businesses right now, who just recently got funded in the millions of dollars, just based off of an idea. Nothing more. No sales. No real business at all. Just a couple of ideas. You really need to go over to Techcrunch... you can see some of this stuff happening.

I've gone through ton of investment pitch training, and have had some amazing people guide me over the past few months. It's people they're investing in these days.
     
freudling  (op)
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Apr 9, 2011, 08:06 PM
 
Originally Posted by Waragainstsleep View Post
How much are they offering to lower their stake once the money is coming in? Would their investment be enough to get the product onto shelves? Is time a factor?
Not sure how much they are willing to lower yet. I'll know in a few days. It might be below majority from what I gather. And yes, the investment would be enough to get the product to market.

Originally Posted by Waragainstsleep View Post
You say you don't know too much about their backgrounds, but you turned down more money for a lower stake already because you didn't think that investor had the necessary experience/skills/contacts to help you as much as you'd like.

Is it just cash you want from your investors? It sounds like you want more.
I do want more. Guidance, knowledge, etc.

Originally Posted by Waragainstsleep View Post
If I were in your place, I would be looking at borrowing enough cash to finish a prototype and get a final cost price per unit. That is what you need to start taking pre-orders. Then you get the pre-orders, then you have some serious negotiating clout with your potential investors.
Borrowing is not an option at this point in terms of bank loans. At any rate, it just needs to be in a finished state, and we've got customers waiting.
     
Waragainstsleep
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Apr 9, 2011, 08:25 PM
 
My mistake, I assumed the episode had aired, fair enough if its not in the public domain yet, but you could still be giving us more info without giving your idea away if you want better input.

Is it an improvement on something that exists or something entirely new?
Is time to market a concern?
Are we talking tech?
Is it something you can put in a package and sell on a shelf or is it for supply as a component in something else?

It sounds like you might regret turning the last offer down already. The trick is not to compare that one to what is on offer now. If its not available any more, you need to forget it ever was.

I would wait and see what percentage they come down to. If its something you can live with, then you are getting the best of both worlds. If it all goes tits up before you make any money, then they are carrying the majority of the responsibility, including any debt. If it makes money, the majority reverts to you so that seems pretty good.

If you still aren't entirely happy with the figures they want to give you, then you need to ask them what else they can bring to the table. Do they have relationships with buyers you haven't spoken to? that sort of thing.
I have plenty of more important things to do, if only I could bring myself to do them....
     
Phileas
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Apr 9, 2011, 09:08 PM
 
Originally Posted by freudling View Post
This is complete nonsense and couldn't be further from the truth. I am thinking of two businesses right now, who just recently got funded in the millions of dollars, just based off of an idea. Nothing more. No sales. No real business at all. Just a couple of ideas. You really need to go over to Techcrunch... you can see some of this stuff happening.

I've gone through ton of investment pitch training, and have had some amazing people guide me over the past few months. It's people they're investing in these days.
Oh dear. You're falling for the Kool Aid, right? Who do you think actually owns these start-ups that are getting funded right now? The people with the ideas? Or the people with the money?

Do I hear a penny drop? Yes, getting funded means jack-shit. People talk about businesses getting funded as if that would mean that these businesses are actualy making a profit. It's a joke, and it's about to come to an end.

What is happening right now is that there's money sloshing about. Enough money that people are staking chances, explore options in the hope that one might stick and be the next Facebook. It's unsustainable and the people with brains, who tend to live outside the RDF, are calling it what it is - a giant bubble.

Take a look at color.com. A crap idea, funded to the tune of 41 million before they even launched. That's insanity, and just like the housing market did so very recently, it too will implode.

Ayway, I don't mean to rain on your parade. If it works out for you, if you manage to get both funding and end up making a profit and manage to hang on to a meaningful slice of your business, all power to you. I just haven't seen that happen very often.
( Last edited by Phileas; Apr 9, 2011 at 09:16 PM. )
     
freudling  (op)
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Apr 10, 2011, 04:38 AM
 
Originally Posted by Phileas View Post
Oh dear. You're falling for the Kool Aid, right? Who do you think actually owns these start-ups that are getting funded right now? The people with the ideas? Or the people with the money?

Do I hear a penny drop? Yes, getting funded means jack-shit. People talk about businesses getting funded as if that would mean that these businesses are actualy making a profit. It's a joke, and it's about to come to an end.

What is happening right now is that there's money sloshing about. Enough money that people are staking chances, explore options in the hope that one might stick and be the next Facebook. It's unsustainable and the people with brains, who tend to live outside the RDF, are calling it what it is - a giant bubble.

Take a look at color.com. A crap idea, funded to the tune of 41 million before they even launched. That's insanity, and just like the housing market did so very recently, it too will implode.

Ayway, I don't mean to rain on your parade. If it works out for you, if you manage to get both funding and end up making a profit and manage to hang on to a meaningful slice of your business, all power to you. I just haven't seen that happen very often.
I agree, stuff like colors is ridiculous. Where is all this money coming from? And I also think colors is a terrible idea and I would never use it. But who knows what other people like. Anyway...

As for us, it's way less money and a lot of hardworking people with a good chance for profits. We're business-to-business and business-to-consumer...
     
Waragainstsleep
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Apr 10, 2011, 05:39 AM
 
Well if you are being offered enough cash to get to market and into profit, and you don't have time to find a better offer, then take the one you have.
I have plenty of more important things to do, if only I could bring myself to do them....
     
Phileas
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Apr 10, 2011, 07:32 AM
 
Originally Posted by freudling View Post

As for us, it's way less money and a lot of hardworking people with a good chance for profits. We're business-to-business and business-to-consumer...
In which case, I would mortgage my house, borrow from family and max my credt cards. The first question, whether spoken or not, from any investor will be "how much are YOU risking in this"?

And if the answer is "sweat equity", then I know enough to either not bother or to just take the entire idea over. Jason Fried, one of the founders of 37 Signals, has written extensively about the benefits of boot strapping it, so has Seth Godin and an increasing number of other writers. Brooke's law, "9 women can't make a baby in one month", applies to start ups as well as to coding

We were recently asked to invest in a new idea, invest by providing professional services in return for stock. They too were all upset when we told them that one hour of our services was worth more than the net value of their entire company in it's current state. There was just no way to make this work. They didn't find the cash they needed to engage us and we didn't waste our time - because they also didn't find the cash they needed to get their manufacturing up and running and their office lease secured. All this on the back of an idea that, if realized, has a good chance to succeed, not just to succeed but to change an entire sector for the better. Still, they need cash and they can't find it.

Seriously, if your product has buyers waiting, have you thought about tapping these buyers for investment, kichstarter style? You could get the money you need, they get early access to your product. You also keep control of your company, your vision and your future. Everybody wins.

It's hard to give meaningful advice without knowing how much of a cash injection you need. 10k? 50k? 100k? Those are very different numbers, leading to very different strategies.

One of the reasons I have such strong feelings about this issue is because I've lost control over two start-ups by getting involved with investors too soon. The first company we sold too soon because we were blinded by the cash on the table - it was a pittance, but I was young, stupid, poor and greedy. The second time around my stock got diluted because I could not match the investment that was flowing in from other sources. That I was one of the original founders meant nothing.

Third time around we had learned our lessons. Picked solid partners who have skills we needed to succeed, start slow, leave cash in the company, reinvest. We've been profitable (modestly) since year one, and are looking forward to a good year three.

A year ago we were approached by an agent asking if we'd be interested in securing investment. We sent them packing.

Edit: Here's a link to an excellent interview with Jason Fried: http://huffduffer.com/gunnarm/16332
( Last edited by Phileas; Apr 10, 2011 at 07:47 AM. )
     
freudling  (op)
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Apr 10, 2011, 10:47 AM
 
Originally Posted by Phileas View Post
In which case, I would mortgage my house, borrow from family and max my credt cards. The first question, whether spoken or not, from any investor will be "how much are YOU risking in this"?
I really appreciate your advice.

The one thing though, why are we all so quick to generalize to other people? That's great you had your experiences, but how do you know it's anything like the situation we are in now?

There's just so many variables one person's experience does not necessarily equal another's.

Here's one piece of advice I really don't like in business and start ups: "borrow from friends and family". To me, that's the worst advice ever. I don't want to involve my friends and family in a business where they could lose their money.

But hey, that's just my opinion.

Anyway, yes, I've invested the little money I have... I have cash in this. Second, the investor is very human... and is willing to drop his share once we get a first sale. He's been open, honest, and incredibly fair throughout.

There is no possibility for us to raise money ourselves... we need investors. So here I am.

As for sweat equity, I've already made my position known. Unlike some people, I don't think it's easy to just take someone's idea and make it successful. Obviously this is a case-by-case basis, but in our case, the people are the one's that will make this a success. That's what these investors are investing in. The idea they like... that is just a given at this stage... they also like our progress... but they like the people first and foremost.

It's somewhat easy to have ideas and fool around, but monetizing those ideas and making a long-term successful business from it is very, very hard. That's why the right people are so important.
( Last edited by freudling; Apr 10, 2011 at 11:55 AM. )
     
Phileas
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Apr 11, 2011, 11:21 AM
 
Oh, I am not trying to tell you what to do - just throwing ideas around and sharing my own experiences.
     
freudling  (op)
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Apr 11, 2011, 02:48 PM
 
Originally Posted by Phileas View Post
Oh, I am not trying to tell you what to do - just throwing ideas around and sharing my own experiences.
No problem, it just sounded like you were generalizing. But thanks, I appreciate your feedback and seeing how things went for you.
     
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Apr 11, 2011, 04:25 PM
 
Originally Posted by freudling View Post
No problem, it just sounded like you were generalizing. But thanks, I appreciate your feedback and seeing how things went for you.
One more thing.

I've never heard of this kind of deal. Suggestion: offer them debt NOW at the face value amount that you need to finish the project, and have that debt convertible into x number of shares of the firm (or shares worth x percent of the equity).

That's sort of a reverse convertible structure, but I've never seen anything like this exactly.

Another alternative is to go to those folks who've given you letters of intent and offer THEM debt for the cash you need to finish the product. Debt is so much easier than equity b/c you have to spell things out clearly.

Whatever happens, please followup so we'll know (if you can).
     
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Apr 11, 2011, 07:44 PM
 
We are forced to generalise to some extent here.

I think you are right about not borrowing from friends and family (unless it really is a small amount and you have some very wealthy friends or family), not a good idea.

An investment in a product or idea is always an investment in the people behind it in part. Yes, the idea has to be good but again your are correct in saying you have to be pretty sure that that you have people who can make it work. No-one is suggesting for a second that you can't make it work or that the work you have done already is in any way bad, but do you really think that no-one else in the world is capable of doing it? There are whole industries built on doing exactly that, look at the knock-off iPods and iPhones coming out of China.

Want better examples? Remember Konfabulator? (It was Dashboard before Dashboard existed.) Apple could have easily bought a finished product and integrated it without much fuss, but they basically stole the idea and rewrote it themselves.
30 years ago Compaq reverse engineered the IBM PC...

That said, this is another pointless, if interesting argument. If what you say about your valuation is correct, and the sums involved really are small, then the offer you have sounds good to me. The company is not worth much to anyone including you until you actually sell something, so the offer you have seems pretty fair. The investor is probably just making sure he can step in and get the product to market if it turns out that you can't for whatever reason. The question then is do you believe he has the skills to get the product finished and sold if he chooses to step in and throw his weight around?

You haven't really said what your issue is other than him having a majority share. Do you think he will step in, make stupid decisions and run the project into the ground? Or do you think he will try to seize your idea and run away with it?
I have plenty of more important things to do, if only I could bring myself to do them....
     
freudling  (op)
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Apr 11, 2011, 10:30 PM
 
Originally Posted by Waragainstsleep View Post
We are forced to generalise to some extent here.

I think you are right about not borrowing from friends and family (unless it really is a small amount and you have some very wealthy friends or family), not a good idea.

An investment in a product or idea is always an investment in the people behind it in part. Yes, the idea has to be good but again your are correct in saying you have to be pretty sure that that you have people who can make it work. No-one is suggesting for a second that you can't make it work or that the work you have done already is in any way bad, but do you really think that no-one else in the world is capable of doing it? There are whole industries built on doing exactly that, look at the knock-off iPods and iPhones coming out of China.

Want better examples? Remember Konfabulator? (It was Dashboard before Dashboard existed.) Apple could have easily bought a finished product and integrated it without much fuss, but they basically stole the idea and rewrote it themselves.
30 years ago Compaq reverse engineered the IBM PC...

That said, this is another pointless, if interesting argument. If what you say about your valuation is correct, and the sums involved really are small, then the offer you have sounds good to me. The company is not worth much to anyone including you until you actually sell something, so the offer you have seems pretty fair. The investor is probably just making sure he can step in and get the product to market if it turns out that you can't for whatever reason. The question then is do you believe he has the skills to get the product finished and sold if he chooses to step in and throw his weight around?
First, thanks for chiming in. Ya... I'm well aware... I don't think we're the only people who can do this. But to be honest, I don't think there are many people who will do this as good as we can. At any rate, they're really isn't anything like this on the market so we'll be early movers. It's one thing to do this... and even to copy... it's another to build a sustainable business with the proper service and support to go along with it. Most businesses struggle with this, typically today. If they even get that far... too many bullshit Internet businesses.

We're real people who care about this. I welcome competition. It doesn't 'scare' me.

Originally Posted by Waragainstsleep View Post
You haven't really said what your issue is other than him having a majority share. Do you think he will step in, make stupid decisions and run the project into the ground? Or do you think he will try to seize your idea and run away with it?
Ok... I am afraid he'll step in, make stupid decisions, etc. And I also am afraid he'll try to seize the idea and run away with it...

Which leads me to a question I have.

If he takes a majority, and I have just slightly less (51/49), what does that really mean for me? Could he 'run' things? Force me out? These are things I don't know but worry me.
     
freudling  (op)
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Apr 11, 2011, 10:33 PM
 
Originally Posted by finboy View Post
One more thing.

I've never heard of this kind of deal. Suggestion: offer them debt NOW at the face value amount that you need to finish the project, and have that debt convertible into x number of shares of the firm (or shares worth x percent of the equity).

That's sort of a reverse convertible structure, but I've never seen anything like this exactly.

Another alternative is to go to those folks who've given you letters of intent and offer THEM debt for the cash you need to finish the product. Debt is so much easier than equity b/c you have to spell things out clearly.

Whatever happens, please followup so we'll know (if you can).
Interesting. Only thing is they're saying they'll finance further after we prove ourselves. This is just Phase A funding right now. So that's why they seem to want to be going for an equity stake.
     
mduell
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Apr 11, 2011, 11:00 PM
 
It's time to close an order. Turn one of those non-order things (letters of intent, interested something, whatever) into a real order and watch the investor's $/share assessment move much closer to your own. You get good at what you do; you'll never get good at selling things if you don't start by selling things.

51/49 means he can tell you to get bent. Do not give up the company.

37signals did a profile of the company I work for recently. No outside investors partially because we never found anyone that "got it."
( Last edited by mduell; Apr 11, 2011 at 11:07 PM. )
     
freudling  (op)
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Apr 11, 2011, 11:28 PM
 
Originally Posted by mduell View Post
It's time to close an order. Turn one of those non-order things (letters of intent, interested something, whatever) into a real order and watch the investor's $/share assessment move much closer to your own. You get good at what you do; you'll never get good at selling things if you don't start by selling things.

51/49 means he can tell you to get bent. Do not give up the company.

37signals did a profile of the company I work for recently. No outside investors partially because we never found anyone that "got it."
Thanks for the advice. The problem though is we can't sell to customers yet. We need to finish building. That takes money and we don't have any. Period. We're talking another 6 months and like 20 people on staff. That's just the way it is. We're not able to sell because we don't have a product yet.
     
freudling  (op)
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Apr 16, 2011, 12:46 PM
 
Originally Posted by Phileas View Post
What is happening right now is that there's money sloshing about. Enough money that people are staking chances, explore options in the hope that one might stick and be the next Facebook. It's unsustainable and the people with brains, who tend to live outside the RDF, are calling it what it is - a giant bubble.

Take a look at color.com. A crap idea, funded to the tune of 41 million before they even launched. That's insanity, and just like the housing market did so very recently, it too will implode.
Hi. I just want to reiterate about how right I think you are about this mobile/social craze in the tech industry being a bubble, and how it will burst. Venture Capital is scarce right now because the recession killed investors' exit opportunities. They don't have as many buyouts... profits are down... not as much money to invest. One result is that higher risk investments like in software don't get funded as much, etc.

Right now things are, however, kinda like the dot com boom, but for mobile and social. The stuff like colors getting all this money is insane.

Let's take a look at Flipboard. It's now got a $200 million valuation, and has raised like $50 million. Fliboard? Really? That thing was coded in about 4 weeks. It's not that complicated and easily replicated. There's already lots of competition soaking up users too. The amazing thing about this is, quoting from Techcrunch:

After almost a year on the market, Flipboard "has no revenues".

This is the problem with all this stuff. The business models don't seem set up to make a lot of money. The value of these things is very much a matter of perception with nothing really tangible, both in physical assets and cash. Get a few large investment funds behind you, and hey! Now you're worth something.

Another major problem is the speed now at which people can copy, and outcompete you. Just look at all the Flipboard alternatives getting better reviews and more attention. It's hard to see how they're going to make any money, really.

It's only a matter of time before this stuff bursts, and people realize that throwing millions into things that don't make much money is a recipe for collapse.

I think back in the dot com boom, there was more stuff to chew on. Enterprise backends, lots of 'new' tech then that we now take for granted... stuff you can get open source now... copy and paste jobs.

Today, in tech/software, it's quirky social stuff that have very questionable money making potential. Just gimmicks that seem to come and go on a weekly basis. How any of this crap is getting so much money... other than inflated, imaginary value which equals an exit strategy... is beyond me.
     
mduell
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Apr 18, 2011, 07:36 PM
 
Originally Posted by freudling View Post
This is the problem with all this stuff. The business models don't seem set up to make a lot of money. The value of these things is very much a matter of perception with nothing really tangible, both in physical assets and cash. Get a few large investment funds behind you, and hey! Now you're worth something.
You (a person, an organization) get good at what you do. How do you become a really good pianist? Cyclist? Mechanic? You do it!
Organizations need to start out making money very early so they can get good at it. If you only ever take money, that's what you'll be good at: looking for investors to take money from, instead of making money.
     
freudling  (op)
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Apr 19, 2011, 07:09 AM
 
Originally Posted by mduell View Post
You (a person, an organization) get good at what you do. How do you become a really good pianist? Cyclist? Mechanic? You do it!
Organizations need to start out making money very early so they can get good at it. If you only ever take money, that's what you'll be good at: looking for investors to take money from, instead of making money.
Amen brother.
     
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Apr 19, 2011, 09:32 PM
 
The investors' goal is to make money. That's it. If you give them controlling share, they will make decisions to get money as quickly as possible and they will cash out or do whatever to take out their money and move on to something else. They do not care about the long term viability of your company. You are a pawn in their quest to get more money.

Keep that in mind when deciding how much controlling share to grant them. If you need to do anything with the business before entering into this agreement, make sure you know who is paying for it, and if that counts as part of their investment; even the lawyer fees. Also, make sure their shares do not give them more power than yours. If they have a different class of shares, they could do an IPO that dilutes your shares but not theirs.
     
   
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