Buying a...MVP? Not really an idea, not a business. Need help w/ valuation.

[rhyeal]

Here's the scenario:

One of my friends has a cool piece of software that is in the lifestyle business. It is geared towards people that are into tattoos and bridges the virtual/physical divide. It's a pretty cool idea. However, it's more than just an idea. He's got it to the point of a few random customers - not friends and family - but no more than 5 customers. The company's software is built. He's identified a niche and is building a list via a landing page. The product works and doesn't have major bugs. It's a complete Minimum Viable Product (MVP). Basically, the whole product is ready to scale - it seems.

However, he sucks at marketing. He's a builder, but he's looking to license his tech instead of growing the company himself.

I've got a chance to make an offer for the technology and essentially get a worldwide, exclusive license to grow this tech. I'd own any improvements I make, but as long as it has his tech in it, I'd owe royalty fees. If I fail, he wants the tech back, minus my improvements, so he can try to re-sell it again. Makes sense to me.

I know that INEs are about $100-1k based on this forum.

This isn't an INE, because it is a working product. But it's not a business, because it's like the business engine is built, but there's no gas. I'm not certain the business will work beyond the 5 or so customers thus far. But it's also working well enough that those 5 customers came in with what little marketing is being done. It seems the product has a product / market fit based on initial customers.

He's asking for $5,000 - $10,000 for the license, payment terms negotiable, likely over 12 months. Plus 5% royalty license fee on the revenue I make, minimum $1k / mo royalty payment after 3 months. Additional software support / tech support / system maintenance support would be a monthly retainer, about $1-2k per month for as long as I need it. He's put in about 3+ months of building the software, website, mailing list, audience, marketing strategy, etc. He's a full-stack dev, so replicating the tech would be paying someone like a $140,000 yearly salary for 3 months or so.

Help me understand how to best value this. It seems like it's worth more than an idea. It seems like it's copyright-able in the US, so there is a license legally that can be granted. But it seems far short of a working business where a normal cashflow model would be the way to go. It also seems that boosting this with some marketing could result in a very valuable business for me to own and sell.

Thoughts on what I should counteroffer? Is this cheap or expensive based on what you guys have seen before?

 

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[Kid]

One. Find customers before you buy his business. If you can't find customers now you won't find them after acquisition .

Two. Copyright is attached to code. Not the Idea. If someone will implement same idea with different code, then you have copy cat competitor.

 

[rhyeal]

One. Find customers before you buy his business. If you can't find customers now you won't find them after acquisition .

Makes sense. I believe that I can make a lead gen that works well enough to increase customers.

As for the second point, I believe the current product that's written would be more expensive to copy vs. license.

Any thoughts on the structure of the deal, terms, and pricing?

 

[Kid]

As for the second point, I believe the current product that's written would be more expensive to copy vs. license.

Maybe it's too far in the future, but its better to assume you will have copy cats.
Here's quick article about Fisker, an early Tesla competitor.

burning through $1.4 billion

source
(as a food for thought)

Any thoughts on the structure of the deal, terms, and pricing?

I lack experience in that. So i'd rather not misadvise about that.

But this reply is also a friendly bump to more experienced people on the forum.

 

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[Rabby]

I like @Kid 's idea of finding customers before licensing it, if you can do that.

I would say it's fair to negotiate the upfront cost if you're trying to conserve capital. Even though it's not a huge amount, it does represent a risk. Maybe finance it by increasing royalty to 10% until your friend has made 20k or something. Then drop it back to 5%, if that's the number you want.

From his perspective, maybe he wants you invested enough that he knows you're serious, hence the 5-10k up front. But I would be wondering how much he's making off of the 5 customers. How likely is it this makes money on a larger scale? Unfortunately I know very little about tattoos, so there's not way for me to know how great/terrible an opportunity this is.

Negotiations are very subjective in my experience. Perhaps nobody knows if the thing will work. From his perspective, he wants to emphasize the market potential and the value of work already done. From your perspective, you need to emphasize the risks, and all the work you would be doing that gives him more or less free money (assuming there is no ongoing maintenance on his part). Understanding both sides really helps, especially when you can find benefits or terms that the other party hasn't thought of.

Here's one of my favorite thought exercises in negotiations. What does your friend actually want? Is it $10,000? More likely it's something they can eat, use, gain social status from, or feel important because of. More than looking at numbers, which bore everyone equally, get in the habit of looking for those things. Sometimes you have to just ask. "Why $10,000?" People's answers are often different and surprising.

Also knowing what people really want, you can use those things in the negotiation. "Well if I need to ___, I can't really pay ___."

Hopefully that's not too abstract to be useful. If it is I can add some real examples.

 

[rhyeal]

Here's one of my favorite thought exercises in negotiations. What does your friend actually want? Is it $10,000? More likely it's something they can eat, use, gain social status from, or feel important because of. More than looking at numbers, which bore everyone equally, get in the habit of looking for those things. Sometimes you have to just ask. "Why $10,000?" People's answers are often different and surprising.

Also knowing what people really want, you can use those things in the negotiation. "Well if I need to ___, I can't really pay ___."

This is great advice and touches on the role that money plays representing an ideal that each party has. Love the insight.

After digging into the opportunity some more, I'm passing. Not necessarily due to the idea, but due to focusing on the company that I am already trying to get started. If I'm running 5 ideas at once, I'm running nowhere - the hardest lesson in entrepreneurship to learn!