What to do when an investor ask for a percentage of future revenues


1

We have a profitable hardware and SaaS business. some clients want to obtain a 12-month financing to buy our hardware. we need extra money to allow it. that would increase our monthly income by SaaS too.

An investor want to put that money if we:

  • Pay his money using the first client's monthly payments (before we can profit from the sale)
  • Share 50% of the profit of the hardware sale
  • Share 50% of the profit of the SaaS indefinitely
  • Share 50% of the risk (if something goes wrong and the money has to be paid back)

This investor would additionally advice his clients to buy our software. he says he has an strong influence in them.

We propose back:

  • Share 10% of the profit of the SaaS indefinitely, because we appreciate he's using his reputation to encourage clients to buy from us, not because of the money lending
  • Pay his money using the first client's monthly payments (before we can profit from the sale) and an interest rate superior of the offered from local banks
  • We won't share with it the hardware sale profit
  • Share no risk
What points would you change of the deal?

Is it unfair for him or us?

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asked Aug 24 '12 at 02:14
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Sd Reyes
156 points
Get up to $750,000 within 24 hours with a small business loan from Clarify Capital
  • Isn't this what banks are for? It looks like you need to raise short-term capital. As for introducing clients, pay a small commission for that, but don't give away the farm or you'll have nothing left to get out of bed for. – Steve Jones 7 years ago

4 Answers


3

Your question suggests that there is some confusion between "investment" vs "loan" and "sales commission / brokerage fees".

Either he's going to invest in your company - an amount of money in exchange for a percentage of equity. This is a long term move and the investor shouldn't expect quick wins.

or he's going to loan you the money, against a set of terms and an interest rate / administration fee. This is a short term move and should feel similar to working with a bank.

or he's going to help you sell your products, in exchange for brokerage fees / commission. This is a short term move and you should try to limit the ongoing effects - i.e. no 'percentages forever' agreements.

If you need short term cash in order to do something (e.g. build up inventory) prior to the sale - get the sale agreed and go to a bank.

answered Aug 24 '12 at 20:07
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Nick Stevens
4,436 points

1

Is there a reason your customers can't get this financed through a leasing company? If it were me I'd find a leasing company I could refer customers to and/or partner with for those that need financing.

answered Aug 24 '12 at 05:31
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Jmp
191 points

1

This is wrong: 10% forever, superior rate. Dont try to make him too happy and you'll be fine. It's just business. If he doesnt run finance company, you can even push lower rates and he will be still very happy, why are you trying to pay him more money? You are not paying him directly for selling.

answered Aug 24 '12 at 08:20
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Andrew Smith
211 points

1

You need to consider what happens if things go wrong. What happens, for example, if he isn't able to entice any of his buddies to use the service?

This is what I'd propose:

(1) He gets a commission on any sales he brings in.

(2) He gets preferred stock, so he gets a dividend before anybody else gets a dividend (but, if no dividend, then he gets nothing)

If he pushes, then put a certain percentage return on the dividend (say 5%) and make the dividend cumulative. (So, you can't pay a dividend to anybody else until he gets paid back for any dividends he missed).

(3) He gets a board seat so he has input on the compensation of officers (perhaps put in a provision that he has to vote affirmatively to increase officer pay or grant bonuses).

It's really rare to get a forever cut on anything unless they actually helped develop that thing, in which case they get a royalty.

answered Aug 24 '12 at 23:51
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Chris Fulmer
2,849 points

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