I current own my own business and make quite a bit of profit. Well I am looking into other things and found some friends that have a good idea that I am interested in.
These friends only have the idea and want me to finance the whole thing. The would like me to provide my experience and advice to move the company forward but the friends would do all the work. I will do the incorporating and legal side of things but they will get the clients and run the business.
I will be providing all the financing, start-up legal paperwork, proving advice and bringing my experience and connections to the table. I don't want to do anything after that...but I want to make sure I am not pushed out once the business takes off or other financing comes in.
So the questions are:
You are an angel investor. Why? Because your friend mostly wants you onboard for your money, he doesn't expect you to dedicate any significant amount of time.
51% is a bad number. The whole deal sounds amateurish. Do you really believe that this "idea" can succeed? Have you figured out how much money you should invest, and what your friend will do with it?
I say you could be an angel investor who is active in the business and depending on the amount you are giving that usually determines the equity position. Some angels want 50% for 250k of funding. If your money will represent the entire funding of the business then yes go for financial control. Here's something else for you..angels typically seek ten times the investment returned so take that concept into your equity calculation.Oh yeh and go after common shares so its not so easy to bump you out of business...
You are an angel investor at the seed stage. You can ask for any percentage you like, but is it warranted is the question. YCombinator gives its founders $5000 per founder and takes anywhere from 3% - 7%. They setup all of the legal structure and meet with the founders for three months; helping them find a product with a repeatable, profitable business model. Then they introduce them to investors. Their success rate is extremely high.
It really depends on how much money you are going to invest at this point in time. Most startups can be bootstrapped; being built and tested for a small amount of money. With that said, if I where your friends, I would not give you more than 7% and I would follow the Lean Startup approach.
The really money should not come into play until the Startup has found a viable, repeatable, profitable business model through experimentation in the marketplace. Once this is in place, then you can talk big money and large percentages.
I would make the next deal, by contract:
You, as the financing guy, will start owning most (75%?, 100%?) of the business and that percentage will be decreasing in time and according to obtained profit that will compensate/return your initial investment, until reach a percentage (50%?, 33%?, 25%?) equitative for the founders.
That way you'll be sure that your friends really work and deserve their part.
How much your friend spend time on the idea? Idea on it's own is a very fluid concept. Is it patentable? Have he done extensive research behind that idea? Is it unique idea and if it is are you sure it will work out?
I would sit down with your friend and ask him, how much he have already spent on the idea. Think about approximately salary he could have been getting for his time. Estimate his contribution. Then think about how much money you would invest into it.
The other thing you would need to look into is how much both of you would be committed to the business.