We are five engineering students, going to start up a company.
As there are many competitor companies in the market, we were looking for an investor to start very big.
Fortunately, we found an investor who is very impressed with our business plan.
Now, we are incorporating our company with him as a partner.
So, there will be 6 directors in the company.
But the problem is, he is demanding 51% shares of the company and rest 49% to us.
He is supporting us -
So, I am asking -
I have many questions and many confusions in my mind.
Please help me to resolve all these problems.
Thank you in advance :D
I'd like to offer you a different perspective.
So, yes. 51% percent of the company means he's got the controlling vote. But is it such a bad thing? If he's very experienced and well known in the startup arena - it's a good thing. His leadership can take you places you've never dreamed of and open doors otherwise closed to you and your fellow students. He offers to support you, take you in and offer you a godo work environment.
Just think about it: if you're successful, you and your friends own 49% of a successful company - this is not bad for someone with the current rank of "Engineering Student" -- this could be the lesson of a lifetime ! and in a good way... think of the connections and doors a success like that opens.
Starts up are formed, and dissolved every day. This will not be your last startup - going on this adventure is a positive thing for you and your (otherwise poor) friends. Make this happen and the experience and financial rewards will be great. Once you have some money of your own--- your second startup will be > 50% owned by you -- guaranteed ;-)
So go for it. IF he is an experienced professional, give him his 51% and work hard and well for your 49%. You are all in the same boat. If he succeeds so will you. If you fail, so does he. He cannot fire you and take away your 49% just because "he has control". You own what you own. 49% of this venture will be your private property.
Go for it !
Drop the deal. Silicon valley VC told us, entrepreneurs, in a meeting: never give up more than 7-10% of the business (standart discount for investing funds - please notice the difference between funds and individual investors-, though, is 20%). Investors should be interested in giving as much money as needed for the business to succeed, because giving you 'half-way' money means they get nothing in return.
What you are talking about is the scenario we decided to exclude as a possibility for our Startup, the investor is employing you, NOT investing in your idea.
From my opinion, a good investor will never try to secure 51% of your company. Reason is simple, it seriously demotivate the founders. Wiser investors take 5 to 20%.
As everyone said 51% means ownership and complete control. That said you have a few options:
1. You can issue different shares (applicable to the US, not sure if possible in India). Quite a few companies with founder CEOs have done this when going public. Basically you have CLass A shares, and Class B shares. Class A shares in revenue, class B is used for voting, etc with no rev share. This way you can hold the vote shares, and give the investor 51% of pay shares, if he agrees.
2. You can put in the bylaws that major reappointments, promotions, changes, etc must be approved by 60% majority. This will basically require, say chairman appointment to require at least one of you to vote in line with the majority holder. This would be acceptable agreement to the investor, however this may hold up a lot of progress due to indecision.
Normally however as a startup you have to take what you can get. If you have a guy offering a group of college students office space, money, influence, and experience; take and don't look back, because not many people will do that. Every day there are brilliant ideas being born and dying, so if you have a chance to make it a reality do it.
First, try to find other investor, a "cheaper one". You will see how much your idea value.
If you don't find other better, I think you should accept it, because you have a high chance of your new business work.
The investor is putting a lot of money in risk, and believing in your work. And as @ron-M said, you have to much to earn in this partnership.
Imho I would drop the deal. 51% means indeed your investor has the biggest say and last word. That is what happened to Sean Parker at plaxo (he got kicked from the board by his investors), and when helping at Facebook, he made sure that could not happen to Mark Zuckerberg.
So how would you make sure the investor drops his percentage? Play it hard. You want to be in charge. So if you are not in charge, drop the deal. If they are really interested they wil negotiate. If they don't, I am pretty sure you will find other and better investors.
I'm not sure about the laws in India, but I am assuming that they're similar to over here, where > 51% gives you the final say.
I personally wouldn't take the offer. We had an Investor once, and she screwed us over. But luckily we had 66%, so we were able to get rid of her before she destroyed our Company, and its reputation.
The choice is yours, and I can't tell you not to go ahead with it, because this Investor might be great at what he/she does, and they might also be genuine. Although I doubt they are; think long and hard before you accept an offer. And at least try to negotiate so you have controlling shares.
Best of luck.
I am facing the similar scenario where the investor wants 51% share holding in my company and also the main product we develop will have 97% of his share in profit and 3% of mine. He will pay all the financials from office expenses to salary and also pay me a fix amount (which is a peanut , considering the project valuation) till we start selling the product in the market.
Should we go for this deal? Or should we demand some different share holding pattern. Do we face the same threat as Mr. Jobs or Mr Parker of being thrown out from the company once the product is ready and starts floating in the market.
Thanks in advance to all