What is the value of my IP (in terms of equity)


3

Here is the scenario:

I am the ceo/founder of a company that will be launching a website/application. The amount of cash I have invested thus far is less than 3,000.

I am currently seeking investments to cover the development cost of the platform (around 30k). This is purely my logic, but I am inclined to offer an x% return on any principal invested with payback beginning whenever p&i becomes x percentage of the companies net income.

Is it possible to build in a clause where the return is calculated as being a ratio or p&i and net income. This may be a more attractive deal to investors?

Additionally, investors in the initial round of funding will always be given first look at subsequent rounds of investing. I may be way off in this line of thinking but I want to avoid selling equity at such an early stage of investing when the company cannot be tangibly valued. If all of that goes according to plan, I will retain 92.5% of the company and have a product that is ready to launch. I will be allocating 7.5% ownership to the development team.

Once we have a product and begin generating interest, I will be going after much larger sums of money >100k to cover operating costs. I realize this next question may be to situationally dependent to be answered, but what should my expectations be in regard to my ownership stake when I am negotiating with investors.

Funding Founder Equity Investment CEO

asked Jun 28 '11 at 13:50
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Eric Littleton
107 points

2 Answers


4

You usually don't dictate the terms of an investment. If you are in Silicon Valley for instance, the current "best practice" is convertible note with cap. So yes, it looks somewhat like what you describe, with an interest, but also with a conversion clause so investors get real stock later if you keep raising money.

I recommend you read articles on venturehacks. Avoid reinventing the wheel. For instance, your conditions about p&i may not be standard, which means they would cause problems.

answered Jun 28 '11 at 16:26
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Alain Raynaud
10,927 points

2

"The potential for this endeavor is HUUGGGEE," Please don't say that to investors since it makes you seem naive and amateurish. It's good to be excited about your idea, but you have to realize that investors see hundreds of deals, and a large number of entrepreneurs think they're idea is huge (I've been guilty of that), and in the end 99% of them or more are wrong.

There are conventional ways to raise money. Read venturehacks and do your research on other sites and try to follow one of the conventional models: straight stock or a convertible note. Trying to do anything exotic for 30K will again make you look like you don't know what you're doing.

30K is considered a quite small investment. Additionally, because it's relatively cheap to build a proof of concept, your chances of raising money without it is quite small. The expectation these days is that you'll raise the initial money from "friends and family," max your credit card, take a second mortgage on your house, or just develop the code yourself.

You can learn a lot from venturehacks, as well as angel.co. Join angel.co, and see the thousands of startups there who have a working product, existing investors and endorsers who are looking to raise money. They are your competition.

Please don't think that I'm not trying to discourage you, I'm just trying to make you aware of the hurdles that you need to handle before people give you money. It's too easy to read the tech blogs and think that it's really easy to raise money. It's not.

answered Jul 1 '11 at 13:19
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Dror
1,833 points

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