Post: #1

I am trying to start a tech start-up after working for more than 7 years in the corporate tech industry. At the moment I have a serious investor lined up for the business. However, I have an issue where I'm not happy with. And I'd like men like us to comment on this. I'm already talking to few other friends on manosphere in person and listening to their words.

The situation:
First: it's me. I have graduated from CASS Business School, with an MSc in Management and Entrepreneurship, along with work experience in blue chip companies in the relevant industry. For this business, I have resigned my corporate job and comfortable salary. Plus, I have left Britain and moved to Iran to build this business. That shows enough my commitment and readiness to scarify everything I have to make it work.

Second: there is an investor. The guy is well connected to the Iranian government and knows all the loops and appropriate connections. He has few spare million dollars in his pocket which loves to have fun with. He himself has more than 15 companies with offices in Dubai and Tehran. This guy is ready to give me an office with equipment plus all staff salaries for the first 12 months.

Third: there is a guy who has connected me to the investor. The investor only puts his money down for this guy because he trusts him and knows him for many years. They've worked together before not only in business, but also politically.

The issue I see here is how we are going to share the equity. The investor wants 50% of the business. The connection guy wants 20% and it only leaves me with 30% of the business. That means I'm going to start a business which from day one I know the maximum I have is only 30%.

In future, I also need an optional pool for future key employees. For example, I need to bring a CTO which I have to give him something like 5%. Plus for the second round of investment (if needed) I will still need to give share away.

I personally don’t get a good vibe from this deal. As it's been said no deal is better than a bad deal. This is not something I'm going to sign. My question is what would be fair. I have suggested that I need at least 54%, investor 45% and the connection guy 1%.

What do you think?

Post: #2

@ IronShark

Hey mate, good to see another Brit on here!

First, my background: I have been working in Banking and with VC for a few years now, so I have seen a lot of early stage investments (as well as companies coming to market a lot later on) and would like to think I am qualified to talk on this matter. I am going to give you a few realistic pointers based on my experience.

1. I'm always shocked by how little the Founder shareholding is in a business. Typically at a time of coming to market (for a successful middle-market firm, when it is ~10 years old), the founder will have ~30% of the equity shareholding in his business. If you have a few co-founders, then obviously this gets diluted. A large early stage investor will usually hold 30-49% and a number of other smaller investors will hold up to 5% each. Then you will also have a few early stage/important employees who will each hold a couple of %.

2. 20% of equity holding in exchange for an introduction is ridiculous for a "brokerage fee". Alternatives:

-Ask your investor if he can pay him off instead
-Pay him out of future firm earnings
(Basically you don't want him to have equity)

3. In terms of your investor asking for 50% of the equity. I would try and get him below 50%, but it really depends on how far you think his $ investment will go. If you think his investment will get you all the way to market then to be honest his request is not too outrageous. Do not underestimate his connections, office rental payment, salary payment and knowledge of the way of doing business in Iran. This will go a long way to helping you and is one headache that most startups don't have the benefit of avoiding. It sounds like he has a good value add from being on board.

4. You should look into share structuring. The equity could be shuffled in such a way that you hold a voting proportion which outweighs your shareholding - so that you retain control of the business (think strategy control etc), but the financial rewards from success would be shared more evenly. It sounds like the "broker" should have very little strategic say in the business - and it would be stupid for him to say otherwise.

Ultimately it comes down to your options and time/effort available. If this is the only thing you have on the table, then you don't have much of a choice. If you have no $ yourself, have exhausted the other options of seed capital and $ from family and friends then you don't have much to lose from taking this offer. But there will often be other opportunities out there - Chinese HNW individuals seem keen to get $ out of China, hell you can even crowdfund some businesses these days..

Post: #3

Just be very careful.

You could easily find yourself on a one way ticket back to the UK and no equity at all, if things go well.

Post: #4

This being based in Iran makes it tricky. Anything there will come with a completely different set of rules and norms than in the West, and much higher risk. I would make sure to be dealing with a very experienced local lawyer no matter what you do, and even then be extra cautious. As a foreigner there you could end up having very few rights if partners decided to screw you.

If you're not feeling good about it now, you won't feel better later.

Post: #5

20% for connector? That sounds like a ridiculous percentage of equity if that is all he has and will contribute.

Whether the investor deserves 50% depends on your level of leverage. If you haven't accomplished any thing as of yet (you have only an idea), you're not in a strong negotiation position. Obviously, in a situation like this, the investor is going to get as much equity as he can squeeze out of the deal while you are still vulnerable.

Do you have a sales record, patents or trademarks that are of value to strengthen your negotiation position?

Is this the only investment opportunity you've fielded? Because if there are no other interested investors, maybe you don't deserve more than 30% for your idea.

Post: #6

The first red flag is Iran. CrashBangWallop made an important point that you might end up with no equity if things go well and your Iranian business partners are well connected. Some things I would consider would be incorporating the business outside of Iran, maintaining over 50% ownership and talking with expats in Iran who have partnered with Iranians.

The second red flag is "I personally don’t get a good vibe from this deal." It isn't a good sign that you are already thinking this at such an early stage. I think you might already know the answers to your questions.

The third red flag is that you are coming to this forum and the manosphere with these unique partnership questions. It's almost like going to your accountant with questions about how to optimize your Tinder profile. There are smart guys here but it is a little odd that you aren't on forums that are dedicated to business, startups, angel investing and venture capital.

20% for the connection guy is either absurd or you are unaware of what he will contribute for that 20%. In either case, you shouldn't be making counteroffers at this time. It is more appropriate to have further conversations to discuss everyone's roles and contributions. If it is an absurd offer then you should not acknowledge it by giving a counteroffer.

When you start talking counteroffers I suggest that you communicate the percentage of the business that you want to maintain and let the 2 other guys decide how to split their percentage. For example, you tell them you want to keep 54% and let them figure out how to divide the 46%. If you counter with 45% and 1% then you might insult the connection guy or take away all of his incentive for working out the deal.

Post: #7

Context: I run a tech business that quite accomplished people have from time to time offered to invest in, and which enjoys an increasing degree of success.

1. As others have said, 20% for the connection guy is way too much. Look to increase your equity out of his share. He should be getting 5% or so max.

2. As far as there being an equity pool for employees, the most normal thing is you agree to divide peri pasu in the event that you issue new shares. So, each according to his shareholding. Example - you have 100 shares divided 50/30/20. You want to sell to an investor/give to a key employee 10% (probably too high for key employee unless very key). You would sell/give 5/3/2 shares respectively.

3. Personally I don't think any investor is going to invest in a start up company run by a guy with no experience of building a business for less than 50%. In fact, I am surprised he hasn't asked for 50.01%. Any sensible investor is going to want to retain some control of his money through a majority shareholding.

4. You shouldn't generally give away controlling equity for less than £1million invested. I don't know what sort of money he is looking to put in, but I'd want that sort of sum on the table before I gave him the majority stake. And the only way you're going to get that for an idea is if the idea itself is really exceptional, or if you have a long track record of business success, which it sounds like you don't.

Post: #8

The goal should be to retain control of the company long term. Why work your ass off to start a company and end up working for someone else? How long of a runway will this guy cover you? Is one year enough to break even/be profitable? Will you need additional funding down the road? For every round of funding, investors typically will ask 25-35%. Are you going to give stocks to all employees or just key employees? Factor all that in and try to retain 51% at a minimum.

If this guy is an angel investor, he should be more interested in pre money valuation rather than equity. You should be able to negotiate him down to 15-20%, depending on how hot you are. He should be able to trust you to make it all work. Asking for such a large percentage this early is not in the best interest of the business unless he wants to run it himself with a Brit as front.

Treat the percentages as just the opening rounds of the negotiations. Best case, negotiate the investment as convertible debt preferably with a cap.

But to be blunt about it, I see 3 scenario where an investor would fund a start-up with no track record: 1) your related, so he is helping family (the connector?), 2) Already got customers lined up so breakeven is a year or less, or 3) someone is getting scammed. An investor with that much money will have access to a ton of deal flows, so why you?

Post: #9

Can say that is out of tune with the kinds of deals I have seen in the European tech startup space. Can't speak for later funding rounds in the 10M range but for the inital "seed" funding 100k-1M a founder retains 40 - 70% of the ownership of the company. The 40% case is where there were cofounders.

Do read this book if you want to learn more about the contracts:
https://www.amazon.de/Venture-Deals-Smar...1118443616
Can learn about all the standard clauses etc used in silicon valley deals.
Then there are various places where you can learn the numbers of different deals.

Minority share holders - investors - will typically give themselves control over certain decisions in a shareholders agreement so that takes away the argument that they should have a big chunk of the company and take away incentive from the founder to actually make a success out of it. The founder needs a big share to enjoy the potential upside while the investors need a small share plus a few rights, liquidation preference to enjoy a reasonable risk/return situation and downside protection.

Have a look at http://www.gust.com . Find out what the typical valuation is of your tech startup is given its traction and growth potential. Then divide what these people are offering to invest and see if the percentages they are taking are right.

Having observed these kinds of negotiations, an important tip is to make sure you have a number of investors competing to join the round to get the price set right. Otherwise the arguments over valuation are too nasty and without basis, it is like oneitis with chasing girls, not a good strategy. Arbitrage where the investors are maybe valued too highly due to lack of investors in the neighbourhood.

Post: #10

Stay away from anything w/Iran. Iranians negotiate and re-negotitate constantly. This 30% will be chiseled down to zero if they have the incentive to do it.

If you are still pursuing this course, Id give no more than 5% to the connector and 30% to the investor....expecting of course the 65% share to be chiseled to 51% eventually

Id keep ownership of shares and intellectual property in a foreign tax haven country (HK or Isle of Man).

I have a few biz arrangements w/Persians and it is a fkn nightmare. I am always getting chiseled. $10 dollars here or there. 2-3% here or there. Slow payments. Late payments. Non-payments. Double-dealings. Agreeing on a 50-50 split but him taking a 100% of "non-related" work and subverting payment from me.

It is something cultural about it. They are incapable of holding contracts and handshake negotiations. Its a baazar mentality when EVERYTHING $ is negotiable at every step.

The big oil companies learned this the hard way trying to operate oil fields in Iran. US dealing w/them on nuclear reactors. The Russia. The french. Everybody foreign has gotten the run around.

https://en.wikipedia.org/wiki/Anglo-Persian_Oil_Company

Don't even presuppose that you will have an edge in this super-corrupt country as an outsider when billion dollar companies are brought to their knees.

Bribes, double-dealings, back-stabbing is very common. If it makes short-term sense to fk you, they will especially if they hold any sort of power over you.

I would 100% avoid unless you have full control of purse strings and ownership and a long run to work with it.

Post: #11

Smart investors put money in exchange for 40% of the company. They want to maintain a huge portion to the founder so he can continue to have his skin in the game.

Imagine they buy 80% and leave you with less than 20%? You might work for the salary and give a damn about the company performance since it won't make that much difference. Why work 80h/week to make 10% more money?

Post: #12

I agree with the others, 20% is a huge fee for the connector dude.

But think about the investor. He has all the skin in the game, all the cash and risk.

You are just a guy with an idea, nothing much to loose really. There are loads of guys with ideas that can sell a proposal.

How many people got a million or two to invest and risk?

Really your investor is bringing all the value to the table, despite that you feel you are.

go 50/50 with investor and he can pay the connector dude whatever he thinks its worth.

Post: #13

(08-07-2016 08:19 AM)birthday cat Wrote:  The first red flag is Iran. CrashBangWallop made an important point that you might end up with no equity if things go well and your Iranian business partners are well connected. Some things I would consider would be incorporating the business outside of Iran, maintaining over 50% ownership and talking with expats in Iran who have partnered with Iranians.

The second red flag is "I personally don’t get a good vibe from this deal." It isn't a good sign that you are already thinking this at such an early stage. I think you might already know the answers to your questions.

The third red flag is that you are coming to this forum and the manosphere with these unique partnership questions. It's almost like going to your accountant with questions about how to optimize your Tinder profile. There are smart guys here but it is a little odd that you aren't on forums that are dedicated to business, startups, angel investing and venture capital.

20% for the connection guy is either absurd or you are unaware of what he will contribute for that 20%. In either case, you shouldn't be making counteroffers at this time. It is more appropriate to have further conversations to discuss everyone's roles and contributions. If it is an absurd offer then you should not acknowledge it by giving a counteroffer.

When you start talking counteroffers I suggest that you communicate the percentage of the business that you want to maintain and let the 2 other guys decide how to split their percentage. For example, you tell them you want to keep 54% and let them figure out how to divide the 46%. If you counter with 45% and 1% then you might insult the connection guy or take away all of his incentive for working out the deal.

I used to work in startups and venture capital negotiations are not unfamiliar to me. There are excellent points made here.

Listen to them.

Regards,

Ivan

Post: #14

In what universe does that Connector dude deserve 20% of the business? That's ridiculous. I'm sure he's just shooting high, but the presumption there is quite strong.

Will he be doing anything else for you guys? I'm assuming you'll be doing all the hard work, so I imagine he doesn't deserve nearly the same level of ownership that you do.

I know very little about business but does it make much sense to put yourself at the mercy of your investor like this? with 50% ownership couldn't he snatch the rug right out from under you if it suits him? Sounds dangerous.
------------------

Dark Triad Man,

I hate to do this, but did you really just do a signature on a post and drop a hyperlink to your blog on it? C'mon, dude, at least contribute to the discussion before not so subtly dropping your blog like that. That isn't how things work here.

Post: #15

(08-12-2016 10:33 PM)Fortis Wrote:  Dark Triad Man,

I hate to do this, but did you really just do a signature on a post and drop a hyperlink to your blog on it? C'mon, dude, at least contribute to the discussion before not so subtly dropping your blog like that. That isn't how things work here.

(06-03-2015 07:57 AM)Roosh Wrote:  RVF is not a vehicle to promote your business. If you have a business, you must go elsewhere to advertise it.

(06-03-2015 07:57 AM)Roosh Wrote:  2. You are always free in your signature to link to external sites that don't have commercial intent (e.g. blogs, Twitter).

3. You are allowed one external link in your signature to a site with commercial intent if your reputation count is at least 30.

Post: #16

Naughty Ivan

Post: #17

Something I forgot to mention; no sane investor will invest in your idea only. They want to see something working.

When Larry and Sergey asked for money, they opened a laptop showing their search engine. The results impressed the angel investor.

Same with any business. If you want to open a restaurant chain, you must have at least a small restaurant or even a damn food truck.

Post: #18

Do yourself a favour and read about Plenty of Fish.

Start with the idea of giving zero equity away, and then only selling some if there is a good calculated reason.