Giving Equity Against New Business


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I started a company in India in June of 2012 focusing on Web & Mobile App Outsourcing Space. In past 1 year we have grown to revenue of $1M+ and we are expanding fast. The company is bootstrapped and I am its sole share holder. Currently, our profit margin is around 20%. The company is growing fast and this financial year we should be doing a minimum of $1.5M in revenues.

I in now in negotiations with a US based company with Fortune 500 clientele. We are negotiating a deal which will be around $1M. The client is saying that he needs an equity within the company in order award us this contract.

Our profit margin on this new deal will be same i.e around 20% and I dont know how to structure this or, whether is this even a good idea at all.

Please advise.

Equity

asked Oct 5 '13 at 17:51
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Mukul Gupta
6 points
  • It sure seems like the answers to this 'question' will just be opinions, but I would stop... take a deep breath... and actually walk through the numbers. "A deal around $1M"... is that total? Is that annual? Could your set up handle double the volume? How much has this other company asked for? Perhaps I misunderstood, but from your description it really sounds like you're setting up a deal with company A that has company B 'Fortune 500' clientele, and the company B clients are asking for equity ownership in your company? – Theao 4 years ago
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1 Answer


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I in now in negotiations with a US based company with Fortune 500
clientele. We are negotiating a deal which will be around $1M. The
client is saying that he needs an equity within the company in order
award us this contract.

It sounds like you are negotiating with some type of software development firm that is trying to outsource their development to you for a $1 million contract.

They probably want equity so that they can have some type of control over your company, which will reduce risks.

If you are billing them your normal rates for that $1 million, then them asking for equity simply sounds like they are getting free equity for work they are paying for.

There are many ways to value your company, and you should do so (keeping your growth rate in mind) and then make a counter-offer, this time including some X amount of money for a portion of equity in the company. HOWEVER, before doing that, I would first query what is the prime purpose for this company wanting equity in your business. As I said above, it could be to reduce risk, but then again, it could also be for another reason altogether, which could come to hurt your firm down the line.

Also, you need to value the worth of the client. Currently you are going to be doing $1.5 million this year, with this client it will be $2.5million. This client is valued at 40% of your revenue, which to me is a bad thing. If I was a founder, I may also think initially it is a good thing to have a big client, but sometimes if you have a lot of recurring smaller clients whilst experiencing super growth as you are, then having this big client could choke your ability to stay lean and grow (think about a situation where this 40% revenue-value client takes up 80% of your company resources - which is a very bad thing).

There are other strategies I could think of, but these are now moving towards opinion, so I will leave those out.

Lastly,

I started a company in India in June of 2012 focusing on Web & Mobile
App Outsourcing Space. In past 1 year we have grown to revenue of $1M+
and we are expanding fast. The company is bootstrapped and I am its
sole share holder. Currently, our profit margin is around 20%. The
company is growing fast and this financial year we should be doing a
minimum of $1.5M in revenues.

If this is true (and it's not some type of homework question) then I applaud you for your success. Well done! Keep up the good work.
answered Nov 25 '13 at 07:21
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Joe
201 points

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