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    9 Replies Latest reply on Feb 9, 2009 7:59 PM by Googie

    Question about investors proposal for my new product

    Googie Newbie
      I have a new product I am trying to get to market and I have a proposal from an investor. The idea with the product is to patent it, manufacture a prototype, and then license it to a company. If we achieve this the investor is looking to get his initial investment back with 8% (approx.) interest and also get a % of the royalty payments. Is this pretty standard or is he asking too much?
      Also he stated that if the outcome of the patent search determines that we cannot go any further with the product I should pay him back the cost of the patent search. This seems like a bit of a stretch for me, shouldn't he incur some risk as the investor?

      How should I determine what % of the company to give up in relation to the amount of money, experience, etc. that he brings to the table?

      Thanks
        • Re: Question about investors proposal for my new product
          bmt2008 Adventurer
          That is a lot of questions:

          First. My opinion is that 8% (especially in this market) is a great rate. Look around at other companies that offer funding and you will see rates in the 12% to 15% range. Regarding the percentage of the royalties - the investors wants part of the up side of your product - I also think that this is fair as he/she is taking a lot of risk in leading his/her capital and expertise. You want to be paid for your work and so does the investor.

           

          Second. I think asking for payback on the patent search and application is reasonable. The investor wants to take a risk on the product's potential - not on its non-potential. The investor is bringing money and experience to the table. You are bringing the product. Each bringing equal value. But, if your value does not measure up, then the investor is taking all the risk.

           

          Third. There are many ways to determine what percentage of a company that should be given. The most widely used is based on pre- and post- money valuations. You and your investor agree on a pre-money value of your product/company. This is the value of the product or company before any outside money is brought in. Then, you add the value (money) the investor brings to the deal (post-money value). Take the amount the investor is bringing and divide it by the post-money value - this will give you a percentage of value the investor is bringing and the portion of the company he/she should receive in return. These numbers can be adjusted for intangibles the investor also brings - e.g. his/her experience and contacts in the industry. Example: Let's say you determine that the value of your company is currently $1 million. The investor brings $100K to the table. Thus, the investor adds approximately 9% to the value of your company and should receive 9% of the company at current valuations. Now, this 9% can be adjusted - say to 10% - because he/she also brings experience.

           

          Not sure how you are structuring this deal. I hope that you have an attorney involved. But, you could consider convertible debt. In this case, the money the investor brings is treated as debt - however you want to set that up (monthly P&I payments, quarterly P&I payments, interest only monthly, interest only quarterly, interest only annually, etc) - but the investor would not have an ownership stake at this time. Now, should your product take off - that debt can then be converted to equity in the company. At this point, you would no longer owe principle or interest but the investor would have an ownership stake in the company.

           

          Just some thoughts and opinions.
          1 of 1 people found this helpful
            • Re: Question about investors proposal for my new product
              Googie Newbie
              bmt2008 thanks a lot for your help. The investor and I will set up an LLC and he will have a % share in it. If we licence the product successfully he will get priority payback of his initial investment with interest (8%) and he will also receive his % of all future earnings in perpetuity. Does this sound right?

              Thanks
                • Re: Question about investors proposal for my new product
                  bmt2008 Adventurer

                  I don't know all the details of your deal - but it sounds pretty fair to me. From what I can gather, you need this investor. I think it is great that you two found each other in this market.

                   


                  It is much better to have a 50% ownership or higher of a great business then own 100% of nothing.

                   


                  Now, just hold your investor to the deal. Make sure he/she lives up to their side of the bargain and helps grow the business with more than just money.

                   


                  Lastly, do remember to protect yourself at all times. While this may be a great deal from a great person - money has a way of changing people. I hope you don't ever have any trouble - but always be looking to protect yourself.

                   


                  And, get everything in writing. I hope you have an attorney looking things over for you.

                   


                  Best of luck,
              • Re: Question about investors proposal for my new product
                Googie Newbie
                Anybody?

                Please even point me in the right direction as to where I may obtain these answers. Should I hire a business consultant?

                Thank you
                • Re: Question about investors proposal for my new product
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