19 y/o offered 6 figure investment. (Need Advice)

[Scot]

Here's an idea that some VC's and startups are currently doing. Do an equity earn back.

It gets a little more complicated and do not do this without a business lawyer involved.

It looks something like this. VC funds you and gets overwhelming majority of ownership. Something like, 90%+

You set obtainable time oriented bench marks. Each bench mark grants you a percentage back of the equity:

• Gain 20,000 Daily active users by month 12 - 10% equity grant
• Reach $100,000 in revenue by month x - 8% equity grant
• Reach $500,000 revenue by month x - 15% equity grant
• etc etc

This derisks the business for the VC. They know that if you screw up, they still retain the IP of the business and the business model. They can fire you, retain 90% ownership and install their own talent to grow the business.

If you become the next Zuckerberg, you get the majority of the business back and they wont mind being in the passenger seat on a 8+ figure rocket.

The numbers and scheme above are completely made up, so research the hell out of this if its something you want to do.

But its a derisk for everyone involved. Because if you tank this business and accrue massive debts and tax liabilities, the 90% owner is the one on the line, not you. Something to consider.

 

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[Kak]

Thanks for your feedback.

The company needs a minimum of 35k to really gain some momentum. It's been pretty asserted that they wanted to take the reigns on the company and offer me a salary (which $ amount was not disclosed). There is still much ambiguity, as I have a bit more 'official' meeting with them this Friday. I'll keep you and the forum posted.

DR

Please do.

Also, be advised. If they offer you a salary... You absolutely NEED to make sure you have a golden parachute agreed upon before you accept their offer or they could just promise you a nice salary or work out agreement and then fire you.

 

[Envision]

Thanks for your feedback.

The company needs a minimum of 35k to really gain some momentum. It's been pretty asserted that they wanted to take the reigns on the company and offer me a salary (which $ amount was not disclosed). There is still much ambiguity, as I have a bit more 'official' meeting with them this Friday. I'll keep you and the forum posted.

DR

Some things I would be curious about when going into the meeting...

1. Why not 50/50 (if you're okay with that) - this wouldn't change the cash they are offering, I'd still want the complete $ offered if I were you but ask them this..

2. Do you pocket the money they are paying you or do they want it to fund the business? (if they want it to fund the business keep in mind the true value of the money they are offering is half of the said price because they would then own half or majority of the company).

3. What is the terms of the salary? If you're not pocketing the money they are offering - what money are you guaranteed when you give up half of your company/idea. If there is no money, and no contracted period of time in which you are paid you can be kicked out.

4. Does who you are going into business with have a record of lawsuits? Look him up in your local city/county and see what his history is. Im always cautious about doing business with someone who has a record of small claims or big time lawsuits.

5. How much time and investment is this person looking to put into your business? Are they in the industry and do they offer something other VC's cant or dont... I wouldnt give equity to someone with money. Everyone has money. I'd give equity to someone who has a method of distribution, industry knowledge, connections, or some other unique or valuable asset that I dont have without them... AND money.

Good luck with your meeting!

 

[D.R. Zachary]

A) Is your business generating sales?
B) Why is money running out? Inventory? Costs? Tiny margins?

Its very hard to answer your question without any real details on the business, the business model, and the industry.

If you want to message me, I'll be happy to give you my take on the business, and if the investor(s) are taking advantage of you, or if it's a good deal. (Use "contact us" link in the forum's footer and the message will eventually get to me.)

Welcome to the forum, great to have another local person in the Phoenix area.

Done. I sent a message through the 'contact us' link, but did not receive a confirmation; would you mind letting me know if you've received the message? Anyways, thank you for your recognition & feedback.

 

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[Michael N]

Hey forum,
Since I am new to this forum I thought I'd give some background info about myself for you to
better understand the situation I am in.

My name is D.R. Zachary, I'm 19 years old & from Tempe, AZ. I've ran 3 companies in 3 years, first 2 were failures, 3rd one was sold for nearly $55,000. That 3rd company allowed me to drop out of college and pursue larger and more scalable business. After pursuing this company for the past 6 months, I've ran into a "first" and am coming to this forum for some advice. (Any feedback is appreciated!)

To start my latest company it has been anything but easy, teaching myself code, working a minimum wage job nearly 40 hrs a week, and selling my car to help fund my ambition. After gaining some momentum and generating revenues of ~$15,000, I decided it was time to seek funding. The person I decided to contact, was really the only person I knew that had remote entrepreneurial success (multi-millionaire). We spoke and after a week of phone calls back and forth, he's shown tremendous passion for the business' plan and myself, and wants to invest. I wanted $35,000 for 20% equity, but after speaking with him he wanted much more equity. To sum up a long story, he contacted his VC friend in Scottsdale and they've offered me $115,000 for 51% of the company. This offer is disheartening I must admit, I've given this company my everything and to think they made me an offer where I would lose majority equity is a bit tough.
I understand the situation from their POV, I am 19, only generating 15,000 in rev., and never been through the investment process. But I truly believe, more than the money, I am the catalyst of this company, day in and day out I work tremendously and continuously learn what I must to ensure this company's success. I believe anything they know, I would be able to learn myself (all while maintaining majority equity); but I need the money...

When the main investor and I were negotiating, and he verbally said he was eager to invest, I assumed it the process was going to take less than 2 months. I quit my job and went all in on the company. 1 month has passed since and I am running out of capital. Banks nor bureaus will take me seriously considering my age and lack of credit, I've considered the idea of speaking with other angel investors, but I must admit I feel as if my back is against the wall. I have tremendous faith in this company and my ability to scale and steer it in the right direction, but I would not have any other choice but to agree to only owning 49% once the time I run out of capital hits. Like I mentioned, any feedback is appreciated.

Thanks,
D.R.

I would put down a counteroffer. don't give someone else control over the ship. you're the captain and make that clear. the last thing you want is someone who doesn't understand the mission or industry and only sees things in dollar signs calling the shots. if you know how to make the business successful, then own it. If they can't see that, then maybe they're not as smart as they look. if that's their final offer then I would honestly walk away, that is unless you think you can strike it big with these guys, and make a 600 million dollar company. at that point, you're just trying to pick and choose how many hundreds of millions of dollars you want. and you might as well choose the path that will guarantee you funding.
cheers

 

[biophase]

At 19 years old, you just pocketed $55k and have an offer of $115k. Tempting... I think like Envision asked, is the $115k yours to keep or is it capital for the business.

If it's yours to keep, I'd be tempted to take the offer, negotiate a decent salary and then agree to stay on a minimum time, like 1 or 2 years.
By 21, you will have:
1) $170k + 2 years salary
2) 49% of nothing or 49% of a good business

If it's for capital, I'd renegotiate it. But the fact that they came in with a $200k+ eval is telling me they really want in.

 

[JonnyC]

If it's not for personally buying out your shares but to fund the growth of the business, I'd suggest going for a convertible note since it's so early stage and hard to value. You'll probably end up with more ownership ultimately and defer the discussion around actual valuation.

https://www.seedinvest.com/blog/startup-investing/how-convertible-notes-work
Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask)

Failing that, I would push back and only ask for the amount of cash that you need. Your valuation should go up and then you can raise more money when you need it from the same investors at a better valuation.

Note that I only suggest this from the perspective of "working capital for the company" - if this is actually them paying you personally for 51% of your shares, I would agree with @biophase since you'll be in a great position afterwards for your next ventures.

 

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[Kid]

1. Why not 50/50

There is very real reason to not go 50/50.

It's the moment when one party would disagree with other. Basically 50/50 with two parties disagreeing equals long lawsuit and halt of operations in company since no decision can be made.

I guess that that's the motivation (or at least a part of it) behind the 51/49 offer.

 

[Dianne Cohen]

I'd love to know how this turns or turned out.

 

[ruzara5]

Just a humble sidenote. If this product is selling. Can you 'crowdfund' the product. Keeping 100% of control?

 

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[MJ DeMarco]

Done. I sent a message through the 'contact us' link, but did not receive a confirmation; would you mind letting me know if you've received the message?

Yes I received it and flagged it for attention later.

To be honest, it lacked any significant detail for me to make an analysis and for me to arrive at any conclusions. Without seeing the products, industries, potential skews, moats, competition, etc, I'd be shooting in the dark, much like here.

 

[HackVenture]

Kudos for your accomplishments so far!

Giving up control is probably a bad thing in most cases but in your case (young, first venture) it could be a chance to build up something bigger than you could otherwise, and faster, and this could be great for your next venture both in terms of experience u would gain and the new capital from the $$ u make.

Bootstrapping and taking a loan from friends/family/bank are obviously the preferable route but what I'm saying is if taking the investment turns out to be the only way for you to gain access to funding that could potentially make the business super big, don't be afraid to take it just because you are afraid of giving up control.