If there's an expiry date on the option, would this then simply mean that the agreement has to be renewed, based on the current valuation on the date of signing the renewed agreement then, or?
Business Valuation
- Thread starter AlphaMale
- Start date
If there's an expiry date on the option, would this then simply mean that the agreement has to be renewed, based on the current valuation on the date of signing the renewed agreement then, or?
Lots of good advice in this thread, and as you can see there is a lot of things to consider in a deal like this. Since your motivation is to grow your business and target institutional level investors, it is a great idea to bring on additional members, just as long as they bring something unique to the table. Without going into details about your operations financials, I am assuming this will be a cheaper option for you cash flow wise than going out and hiring employees (without giving them outright equity ownership upfront) to do the same tasks? I guess this also brings up the question of will these "investors" be involved with the non trading day to day operations of the business going forward? I can speak from the perspective of the institutional investor (i'm an analyst at a institutional fund) and say that being more than a one man shop is a required step to attract institutional money.
As far as the option part of the agreement goes, like other posters have said, it seems weird and a little unusual. I would not structure it where they get any sort of free ride or "long call", unless like Garachen said it is for a very short time frame and beneficial to both parties. For what a dissolution clause might entail, you need to work out if these guys will be passive or active investors. If they are passive, create some sort of option to buy back your ownership after a set time period. But if they are going to be actively involved, it will be pretty difficult to regain complete control, especially if they have put in a lot of sweat equity over the years.
As far as the option part of the agreement goes, like other posters have said, it seems weird and a little unusual. I would not structure it where they get any sort of free ride or "long call", unless like Garachen said it is for a very short time frame and beneficial to both parties. For what a dissolution clause might entail, you need to work out if these guys will be passive or active investors. If they are passive, create some sort of option to buy back your ownership after a set time period. But if they are going to be actively involved, it will be pretty difficult to regain complete control, especially if they have put in a lot of sweat equity over the years.
What could a duration clause look like then? Simply give them, say 3 months, to raise X dollars in capital, otherwise the option will expire and then has to be renewed based on current valuation at that point of time, or what? Just bouncing some ideas here...
Your situation is a little unique given how early in the development stage your situation is. Its hard to say what a clause should like like, and to be honest it can look like whatever you want it to as long as the other party is willing to accept it. There should be certain performance metrics being met by these guys to warrant you giving them an ownership stake (i.e. what do you do if they promise to bring in new assets or help expand and after 2 years they have produced nothing?). Conversely I would assume that they would want certain covenants on your part to cover them if they happen to invest only to have your system not perform close to expected. I like your idea of "raise X dollars" by a certain time, however I think 3 months is a little short. Developing relationships and bringing clients on board can take a while, so I would suggest maybe you give them at least a year, just like you wouldn't want to be judged on your system's performance over only one quarter.
Be very careful there. Respect your position in the equation. What value are capital networks and supposed expertise without a system to exploit. A positive system has value without those. The assumed added value is a collapsing of time. You have the engine, they have some unproven hi octane fuel. Without the engine it just sits in a can.
I agree! I mean, technically I can accomplish what they can accomplish, but in a longer period of time, however vice versa doesn't hold true...
It would very obviously be a bad idea to put yourself as the minority.
Whoa, I missed the part where you were giving away 60%. I read it as 30% combined for their investment, not 30% each. I think this is a big red flag for all parties involved. You are the developer of the system, and put in all of the current sweat equity to get this far, so why should you give away 60% of your future profits? At a certain point it would be more economical to just keep 100% and try and grow organically. The two investors should also be seeing red flags with this proposal as well from their perspective. They should be asking themselves "how is this guy still going be giving his 110% if he only gets 40% of the profits going forward?"
I would recommend not giving away more than 30% stake in your operation. That way you still retain majority ownership in something you created, and it still gives you enough of the pie to keep you engaged. I think this would be pretty standard for any business transaction. A venture capital company wouldn't ask for too much ownership equity in a deal because they would worry that the entrepreneur's interests and focus might wander if his stake was diluted too much.