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Angel Ownership Positions

FloridaStartUpFloridaStartUp subscriber Posts: 1
edited July 2006 in Startup Funding
I am starting a business that will require $450k in start-up funds.  I am putting up $50k and I have an angel who is putting up $100k.  I plan to recruit three other angels at $100k each, but I need to figure out ownership positions.  The pro-forma calls for profitability in year 3.  Dividend payments would be issued in year 4 and the net profit for year 4 is projected to be $200k +/-.Based on the fact that it is my idea, and I will be putting up approximately 11% of the start up funding, what percentage of the business should I be entitled to for ownership?  Would a split of 30% for me and 17.5% for each of the angels be appropriate?
Thanks for any feedback!


  • FloridaStartUpFloridaStartUp subscriber Posts: 1
    Thanks for the feedback.  I will indeed be drawing a salary and being the sales rep for the business.  My salary would be equal to my salary at my current employer, so the transition will not be that bad.  However, that obviously means there will not be "sweat equity" in terms of investment.A preferred position is an option, but my $25k of my $50k investment is in savings and the other $25k is from a home equity loan.  So, I think I would want to pay off the loan when the dividends are issued in year 4.  That may be short sighted but I am trying to be realistic.So, in my current structure (30% for me and 17.5% for angels) do you think I am being conservative on my cut or overly agressive.  I am trying to look at it from the perspective of recruiting 3 other angels.Thanks for your help.
  • robertjrobertj subscriber Posts: 0 Member
    Dear Florida start up:
    Let`s look at this from a different point. One of valuation.
    If you (the company) is going to sell 70% of the equity for $400,000 (the amount your angels will be investing) that means that the valuation of the "business" pre-money is $572,000!
    Assuming you put in your $50,000 to start the company, then there needs to be other things there that make up another $522,000.  Obviously hard assets, if any would be part of the valuation. Some of the other things that are typically part of the valuation include - Intellectual Property, contacts, specific knowledge, business plan andother previous work, the team, etc.
    Hope this helps.
    Robert Johnson
  • FloridaStartUpFloridaStartUp subscriber Posts: 1
    The business I am building is a publishing based business, so there will not be a great deal of hard assets.  I would like to know what you think about the valuation of the business from a potential income perspective.
  • FloridaStartUpFloridaStartUp subscriber Posts: 1
    Thanks for the input.  My lead angel says that angels usually expect a 20%-25% annual return once dividend payments begin to be issued.  If the business in fact generates $200k and he had a 17.5% share this would mean he would get a 35% return starting in year 4.  If the business only did half that ($100k in net profits) it would still mean 17.5% return which is at least close to 20%.  So, if you say that a very safe rate of reurn is projected to be anywhere between 17.5% and 35%, it definitely appeals to him.
    Since its hard to give ball park estimates because of not knowing more details about the business, would you be willing to share some of the parametrs on the deals you`ve structured?  If anyone else can give some of their scenarios that would definitely be helpful as well.
    Thanks so much
  • robertjrobertj subscriber Posts: 0 Member
    Florida Start up:
    Using your $200,000 as a net before figure as year 4 profit - with none before that, a quick "net present value" calculation indicates the valuation at about $1.1 million. Which means nothing unless you can get the investors to agree.
    However, in your latest message, you discuss the return as a dividend which sort of changes the "ball game". Generally, when investors get an equity stake in the company there is some planned liquidity event (sometimes referred to as exit strategy) where the invesotrs can realize the results of their investment.
    If your invesotr is looking for long term cash flow in the form of dividends rather than a stock sale - your should consider something different from equity.
    All the best,
    Robert Johnson
    [email protected]
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