I need some advice

MusoMan

I recently set up a new online company and I've been looking for investment to launch the service I'm offering, marketing etc. It's a very unique idea that I'd like to keep to myself for now.

Last month I was approached by a couple of guys who want to get involved. They are going to put an initial investment of 5k into the company (we need approx 150k) and they seem to think that, with their contacts, getting the investment needed should be a pinch of salt. They can pretty much open all the doors I need to get this company up and running quickly and hav a lot of experience in the market I am entering.

They want 50% of my company. They are genuine guys with a real excitement and energy that I feel is needed to take things to the next level.

Is this a no-brainer or should I try and negotiate their stake down? Will this put them off?


Cheers

DoMyBooks

Without knowing more its impossible to answer that question but look at it this way.
1. You give the boys 50% of your company
2. For what ever reason they don't raise the finance
3. You end up raising the finance yourself.

You've just given away half of your business for €5K

The point is if you do go with this you need a VERY strong shareholder/ directors agreement.

The other thing to consider is what are your chances of raising the €150K without their help?
How much will they bring to the business once its running?
Can you work smarter and reduce the amount you need to start up?

My gut instinct is I wouldn't go near it.

MusoMan

Hi Domybooks,

Thanks for your reply.

Honestly? I'm a complete novice, I just have a good idea. I have no business skills, acumen, knowledge. These guys have their own businesses in the same market. They have promised me their full commitment to the cause.

My dad mentioned drawing up a very strong shareholder agreement too. I just think it's an opportunity that, if I let it pass by, I may regret it. I don't fancy my chances of finding investment myself.

I don't know how knowledgeable you are yourself of shareholder agreements, but what do you think would be needed/accepted by these guys, if I do go down that route.

Apologies for the lack of info re. my business, I'm bound to secrecy (by myself) )

Kinetic^

5k for 50%? Way too big a shareholding.

stepbar

Kinetic^ wrote: »

5k for 50%? Way too big a shareholding.

Why exactly? You don't know what type of idea it is. It could be a pile of doo doo for all you know.


I would tread carefully here. What funds have they got to put into the company bar the 5k they've offered? People often are guilty of a little too much "spoofing" and "bullsh1t" and don't back up promises with hard cash. I'd would discretely "check" them out. For example do a few searches on CRO.ie and see what other companies they are involved in, what shape they are in etc.

As well as that, there's going to be 2 of them and you. If it's a case that you need to give away a percentage the max you should consider initially is 49% (at least that way you have majority control). As the company progresses, your shareholding may dilute as further investors come on board. You may end up with a smal percentage of the company you started.

I would flesh out what exactly do they plan to give "their contacts"? Is the plan to dilute your shareholding further or what?

I would also be careful sharing your idea with too many people. If it's real good, any potential investors "should" be signing a confidentiality agreement. If it's a unique idea, you should also consider patenting it.

Finally, it might be worth having a conversation with one of the universities or institutes e.g http://www.ucd.ie/nova/ or http://www.dit.ie/hothouse/ .

Buttercake

it totally depends on what your venture is

have you thought about taking it to dragons den? seriously? at least you will get some publicity...

if it is something totally unique then patent it asap

why do you need so much start up capital? 150k for what? its a lot fo startup capital

have you put together a business plan with financials as to how you are going to use every cent of a 150k investment?

MusoMan

Hi Stepbar/Buttercake,

Thanks for your advice. To answer your questions:
First off, they have signed confidentiality agreements so I'm happy on that front. (It was drawn up by my solicitor and he advised me that it is strong)
Stepbar, I've spoken with a patent lawyer and he has told me that he would be surprised if my idea is patentable and advised against spending money on trying.
Dragons Den in the UK is definitely on my list but I think I would use that more as a promotional exercise. Besides the dragons will run a mile from something innovative that's not patentable!
It's for this reason that I feel that the large start-up financial position is key. This idea really needs to hit the market with a bang, become the market leader instantly and maintain that grip on the market. I have a strong business plan and robust financials in place.
Stepbar, I have checked these guys out, they're solid, hold director positions in companies that you and I know.
I have already requested the 51% majority shareholding and they are happy with that. (sorry, I should have pointed that out). But yes, your right...if/when more investors come on board, both mine and their shareholding will be diluted so my 51% will definitely decrease by anything up to 10/15%, I guess.
Thanks for the links, I will definitely look into them.
And thanks both of you for your advice. You're really helping me to tease this out in my own head...

Axwell

Would you not consider putting together some form of clause as part of the deal basically saying that the 5k gets them 49% of the business subject to the 150k capital being raised by a certain date. This would be based on the premise that they are fairly sure with their contacts they can raise the money as you stated above.
If for whatever reason the money isnt sourced at that stage then you can both go your seperate ways and they keep their 5k and you can try source the money elsewhere yourself without being tied in to an agreement with them in the long run.

MusoMan

Hi Axwell,

Thanks for your reply. I think that's very sound advice, something I'm going to give a lot of consideration to. Is this done often? Should they be satisfied with something like that in place?

Thanks again

Axwell

Well you need 150k and they say this is easily achievable with their contacts etc. So most of your reason for taking them onboard must surely be based on the premise they will come through with this deal and their own skills etc, as 5k isnt a huge amount of money in the big picture of what you need.

If they cant come up with the money through contacts etc then will the business take off, will you end up raising the money yourself, in which case is there involvement null and void as such yet you are stuck with giving them 49% because you signed a deal.

I would definitely put a clause like this in as it gives them an incentive to come through on their part of the bargain and not sit back waiting for you to get it all up and running and they reap the rewards of their 49%. That would be my opinion and my way of going forward with such a deal.

TheCostumeShop.ie: Ronan

What Axwell is talking about is called a rachet claus. They are fairly common in deals like this, I always use them when i invest in a business as it limits the downside risk for the other party. 5k in terms of buying into a business is very little, so i'm assuming these two are experts in the field your entering and ad lots of value - never underestimate the value of this.

50/50 is a very dodgy number in my opinion, someone should always have the control. Deadlock is such a waste of time.

Certainly counter with an offer less than 50% so you have veto power on any deals for investment that would affect you badly and agree to increase the shareholding upon signing of the 150k investment.

One way you could do it is draw up a simple small contract detailing the roles of the shareholders in the company. And like the others have said "should Mr X and Y not raise 150,000 investment within X months their shares in the company are forfeit". If you can get your solicitor to draw it up and notarize it, it would be better.

I actually learned a lesson with a similar thing years ago. I gave away shares in a company based on the new shareholders raising future capital and it never came. The guys never intended to do it which I found out at a later stage unfortunately. I just put it down to a lesson learned and have had everything Ive done tightly contracted since...

tedshredsonfire

More crucial imho is the relationship you will have. How well do you know these guys. Don't get into bed with just anyone. If your in business together your going to have a lot of interaction and spending time together. Go with your gut on this one. Would you bring either of them home for dinner or let any close relation work for them knowing what you know. If not don't work with them. My opinion.

How much money/time have you invested so far yourself?

finisklin

It seems you have a really good business idea and a plan to back it up. Importantly, these guys see that and are attracted to its potential, plus theya re bringing there own experience and skill set to the project.

50% is a significant amount of equity to give away at such an early stage. Perhaps start at a lower figure and see if you can negotiate that as a starting point?

There is help that can be provided to you and you can access directly - talk to your bank manager and ask for his advise. Perhaps they're are specialists within the bank in this area. As it's a web based business they may have business advisors in this area.

The other supports that are available are the county enterprise boards and Enterprise Ireland (provided there is export potential). Judging by the level of investment you are looking at, the latter is probably your main bet. The fact that you have a business plan will help enhance your position and a business advisor or specialist in raising finance will assist in your decision making.

Exciting times for you....best of luck with it!

finisklin

I came across this...it may be of help.

http://www.enterprise-ireland.com/Technology+Ireland/Starting+a+tech+business.htm

flash harry

so they're putting in €5K, it's your idea, 50/50 - fair enough if they get the €150K that gets the thing going BUT if I want to invest the €145K or so extra you need (to make the 150 total) what am I getting and from whos equity?

As someone pointed out you could end up with say 25% of the company and be out voted a lot. IMO who cares if you become rich out of it but there is lots to consider if it becomes moderately successful - will you have a salaried job, will they? how much? cause it all effects the dividends you get out.....

Also the whole 50/49% thing doesn't mean a hell of a lot when it comes down to it, sure it affects votin but unless someone is doing something seriously detrimental to the comapny you will prob have a board making the decisions

julies boy

PARTNERS ARE allways a iffey thing allways play it safe
is it the 5k or is it their contacts if its the 5k dont bother
dont forget its easey to promise the world and once they have their feet under your table its hard to get them out contract or not (contracts are easy to nul and void and not worth the paper their on )
what u need is a cash invester very hard to find. banks wont even open the door to u
how far along are u (ready to lanch)what is the 150k for (wages,adds,premeses?)can u scale the 150k down

i persinaly dont like partners their is always one lazy one!!! and its never me see if u can string them along a bit and go looking for a better offer contacts can be waffel i have lot contacts dosent mean they will invest. one thing never let someone else have the controling shares
best of luck

MusoMan

Hi All,

Thanks for your words of advice.
@TheCostumeShop.ie, good to know about Ratchet clauses, i've done a bit of research into them, they seem to be quite popular. I discussed the merits briefly with my solicitor this afternoon and he thinks it's a great way to approach their interest, a good way to test them.
These guys are bringing exactly that, experience and expertise and that is exactly why I posted the thread - where do I draw the line between their potential value and the value of my company without them. Obviously I draw the line at giving away 50% but sometimes knowledge and market experience is worth far more.
@El Rifle, again, thanks for the advice. I have a good solicitor that understands my position and I trust that he will watch my back
@tedshred. I've had a number of meetings with these guys, I hav already built up a good relationship with them and I have checked out their backgrounds. It all bodes well. Personally, I have put approx. 15k into the business so far and tbh, that's it, I have no more money left and the banks won't entertain me. I was made redundant last Sept so I have been working full time on my business since.
@finiskin, thanks for the link. I have been in touch with Enterprise Ireland and they can't do much for me because I won't/don't have enough ppl working for me. I hav however, gone to the Local Enterprise Board, submitted my business plan and I'm waiting to hear back from them. They won't be in a position to fund a great deal though, they've already informed me of that so...
@flashharry. If we get the further 145k, both mine and their shareholding will be diluted unfortunately. So that is another concern of mine. I could lose all control of the company!
Once the company is up and running, I will be in complete control of the day to day running of the company and I will be taking a wage (not until company is functioning properly) and certainly not taking any of th 145k investment as a wage
@juliesboy, the 5k is neither here nor there, it's purely contacts/experience/knowledge/development.
The 150k is for initial admin (a lot of regulations to follow before set-up), marketing (75% of it) and web development.

I'm meeting these guys again early next week and I have a good idea in my mind what I'm going to do. I'll let you know how it goes. I really, really appreciate all the advice and kind words on here. Cheers

Axwell

Glad you are thinking of going the clause route, should really give you an idea of how behind this business they are.

As I said previously the 5k is an irrelevant factor, they are bringing contacts and expertise in business as their part to the table and the promise of being able to get the 150k investment to make this business a possibility. It comes down to do you think that their contacts and the 150k is worth 49% in the business and will it make enough money in the long run for everyone involved. The clause is definitely the way to go and will let you see how genuinely behind the project they are.

Best of luck with it!

ontour2

Have your prospective partners indicated what percentage of the company would need to be given away for the 150k? Have you determined a value to your company and can you justify it?

Depending on the value of the company you could offer the guys 49% of the company for 150K. If they want to bring in another person with 145k, they can negotiate how much of their 49% they are willing to give up for the cash. This leave you in control of the company in the short-medium term.