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Is this investment proposal fair?

DannydeWitDannydeWit subscriber Posts: 1
edited January 2007 in Startup Funding
Hello forum,

I`m running a new company aimed at entrepreneurship. We are at the eve
of launch, which will include a number of remarkable products and
services.

Amongst others, an on demand software system, that integrates CRM,
ERP, Fulfillment and Support. In other words, one system for your entire
organization.

Because of the potential of the business, I have financed all development
myself. We`ve been successfully bootstrapping until now. (Sales of about
$150k and highly profitable). But after all investments in our
product line-up, working capital is at a low point. Which you can imagine.

Enter investor/entrepreneur, who offers me this:

- Loan of $100k,=

In return for:

- 40% of shares
- 50% say in management
- And after repayment of the loan the first $750k in free profits will be
100% for myself.

I`m thinking, this is not a deal to be done, but I am considering it,
because I want to asure the company of a successful launch.

What do you think? Is this deal fair?



DannydeWit2007-1-15 7:56:37
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    stonesledgestonesledge subscriber Posts: 608 Silver Level Member
    You definately want to share this with counsel. In my opinion i would say No, it does not look good. Can you try a loan instead?
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    robertjrobertj subscriber Posts: 0 Member
    If he receives 40% of the company for $100,000 -that means the valuation of the company is $250K
    What does it mean to have 50% say in the management - that you both have to agree on everything?
    The company has to repay his $100,000
    And you are condsidering this -why.
    Simply put - stay away from this deal.
    If you have revenue of $150K - you can find a much more attractive way to bring capital into your company - using either debt or equity.
    If you`d like to discuss options for your specific situation, contact me privately
    Robert Johnson
     
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    keyconkeycon subscriber Posts: 34
    Danny, I was going to chime in - However, Robert summed it up very nicely. I don`t know Robert, but if it was me, I`d at least talk to him and hear what he has to say. Keep us posted.
    R@
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    DannydeWitDannydeWit subscriber Posts: 1
    Thanks for the quick feedback!

    I was leaning towards these sentiments myself, as I mentioned in the
    post, but I am tempted by the improved liquidity, which in turn should
    ensure a foothold for the company in several markets, which obviously in
    the greater scheme of things can be considered extremely valuable for
    me to achieve.

    However your feedback does set me straight again. I would like to discuss
    other options with you Robert. Thanks for that offer.

    In this light, it might be of importance to explain a bit more about how
    we`re organized. You could compare us to an organization like described
    here in Business 2.0:

    http://money.cnn.com/magazines/business ... 2_archive/
    2006/07/01/8380230/index.htm

    This is extremely great for us in terms of costs and organizational battle
    strength, but has brought a lot of difficulty in dealing with institutions
    like banks.

    You probably know how that goes, when you don`t really need the money,
    you`re not really motivated to explain again and again to every single
    person, how it`s possible to run a starting company and still have
    operations on several continents.

    But this seems to be the right moment, to get this in place. Although I
    would probably prefer an investor, instead of a bank loan.

    Principal investments in the organization have been made, so now it`s a
    matter of going to market and scaling up.

    Would our unusual structure hurt us in this process? And would you
    change your advice because of it?




    DannydeWit2007-1-14 13:43:42
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    InactiveMemberInactiveMember subscriber Posts: 12
    Before saying no, do a reference check on the credentials of your investor. That should tell you everything you need to know. Any reputable investor shouldn`t have any problem supplying a few references.
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    pepperlegalpepperlegal subscriber Posts: 2 Member
    I tend to agree with Robert`s comments, but also provide the following caution:Unless you absolutely trust this investor implicitly, and have shared and agreed upon management styles, short and long-term business plans, and have developed some sort of exit strategy for the investor, I would strongly discourage you from giving centralized management rights to this individual.  View the proposed relationship as a marriage!
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