What to offer?

DocOc

I am meeting with investors and my attorney has recommended that I
offer the payback in the form of a convertable note. When I talk to
people some state that it is a bit unfair to the early investor because
the get the chance to invest their money after the company has been
going for a little while.....What is the best scenario for investor and
inventor. How do I know how much to offer for a certain amount
invested? I am meeting with a group soon and want to be prepared. Thank
you.

robertj

When I talk to people some state that it is a bit unfair to the early investor because the get the chance to invest their money after the company has been going for a little while......
Unfair to whom? 
The major advantage (to the company) in using a Convertible Promissory Note is that you can "postpone" the issue of "valuation" until a later date.
 

MNGrillGuy

Nonsense, it is not unfair.  The convertable note is a win-win if the terms are good to both sides.  You need the cash, they get a good return but only if the business has in fact mets its goals.  Have you done a valuation?  Have they?  Are you guys close?  The terms are entirely dependent on valuation.  You need to fully understand this process before agreeing to terms.

MNGrillGuy

Robert, is not the conversion terms agreed to up front? 

robertj

Conversion terms can be stated in the note - but I`ve seen many situations where they were not. In fact all the ones I`ve been involved in do not. This is especially useful to the early stage business.

MNGrillGuy

Interesting.  Thanks for the info. 

robertj

Interesting.  Thanks for the info. 

You`re welcome.

DocOc

I have not had a valuation....I am at the initial stages with a working
prototype, and not selling anything yet. The patent process is well
underway, so who`s to say what the company is worth. It is merely
anyone`s guess right now. But we can value it at whatever we want, but
it doesn;t mean its worth anything, just like a house appraisal. It`s
only worht what you can get for it....I don`t want to go throught the
process of paying 10 grand or so on a valuation, when I need that money
to go to product development etc....Does anyone have any terms that
they feel are fair for all parties involved? Percentages and options to
convert to equity in the company at a later date. What time fram is
usually acceptable? This is my biggest hold up right now. I have every
other aspect lined up and ready to go, just sticking on the part of
what is in it for the investor.....I really appreciate all of the help.

robertj

You are accurate when you say that a ultimately the valuation of a business (especially pre-revenue) requires 2 parties to agree on it (the buyer/investor and the seller/owner). I certainly wouldn`t spend money to get a 3rd party valuation at this point. However, it`s not just a guess and not really a good idea to just "pick a number" - there are some sound processes to follow that will give you a range which you can use to begin talks.
Although the Convertible promissory note is a viable tool, it has does create company debt, which may commit you to another funding round in the near future.

EMMYTAY

 Do you have to use a price? Can`t you use number of shares that creates x percentage of equity within a given period of time?

robertj

Emmytay,
By price, I assume you are referring to a "valuation" for the business. In point of fact, whenever you exchange equity for $$ - it leads back to a valuation, whether you state it or it is implied. for example, if you buy half of a company for $10, then the implied company "valuation" is $20.
I advise my clients against stating a percentage of equity in any agreement.