SOP and Legalities for a seed investor?

I would think this would be determined through both parties. It will probably cost 1,000 just to set this contract up with a paralegal.

I have did investment before usually with me being the investor.
Here would be what I would want.
12 percent to me means 12 percent of the business. If I give you seed money I expect growth through the long run just not a year or two.
at a 12 percent share I would expect to have a 12 percent vote on things. Which means I would never do a 12 percent share with just two parties.
If I say I want 12 percent of the profit then that is what I want after costs. I would though set it so that I would get 12 percent of the gross.

As you can see I am turning the tables on you as I'm the investor. Now you can negotiate what you want and if you can get away with not having a contract go for it.
It is him that has to prove legalities issues if something happens since there is no contract. That doesn't protect you but neither does a contract I promise, not 100 percent at least.

Interesting. Thanks so much for taking the time to reply, Hustlinsmoke.

I guess the important factor here is that I do not need an investor. It's appealing to not come out of my own pocket, but I'm launching this one way or another. Thus, I'm in a position to negotiate fairly aggressively.

That said, I like this guy. Even if I didn't, it's important for me to be fair and employ good business practices. In addition to the money, I believe he brings some fresh ideas and a significant knowledge base to the project. I want to work with him.

There is no way I'd do it for 12% of the gross. None at all.

I am also not paying $1k or more for a contract when the investment is only around $3k. I guess if he wants one, it's on him to get it drawn up.

What I'm getting most from your reply is that it only has to be as complicated as he wants to make it. Is that a fair assessment?

The questions that you asked should really be part of a written agreement between both parties.

Personally, if I were to be needing only $3,000 in order to start up a venture, I would most likely not offer as much as 12% in return. Not if I expected the venture to grow to let's say 50k 0r 100k plus annually. Do the math and see how much you would be paying your investor back over the course of 5 years or more, for that initial 3k.

For such a small amount you are better off trying to secure a loan instead without giving up any stake in your venture.

"list of documents that cannot be signed electronically, including: wills, trusts and estates; marriages, divorces, adoptions and other family agreements; court documents and filings; utility service terminations; evictions, foreclosures and repossession notices; health and life insurance termination notices; and documents referring to the handling or transportation of hazardous materials."

Only $3k... and now you're going to have to go through the hassle of legalities, not being sure, spending money on a paralegal, etc etc.

No, it's on YOU and the protection of YOUR business to have one drawn up.

And are his ideas and input part of the official deal? What if he gets busy a month from now and doesn't have time for you?

Then why deal with the hassle and *potential* drama?

What the heck kind of deal have you gotten yourself into?

First, if a $3,000 investment = 12% of the company, that means your company is only worth $24,000? Surely you plan on making more than this... For my last venture I raised $500,000 and gave up 40% of the company. You need to do a realistic valuation and not let the investor dictate what it is, especially for such a small amount of cash. That won't even cover the cost of having a lawyer draw up a shareholder agreement.

Second, investment doesn't equal revenue sharing. If he is buying 12% of your company, then he owns 12% of the company - that doesn't entitle him to any percentage of revenue, and isn't enough voting power to make or affect decisions, set your salary, or anything else. He'll make a return on his investment if you ever sell the business and no sooner.

Full transparency is required for any amount raised - he's a part owner of your corporation, even if it's in a minor capacity. He's entitled to view the books whenever he wants.

Here's the biggest problem with this deal ... $3,000 won't get you squat and any credible investor knows it. After the site is built and launched you're going to need a marketing budget, so what happens then? You return to him and say "I need $10,000 for marketing" - but you already valued your company at only $24,000. So he's going to say "Sure, I'll give you $10,000 for a 41% equity stake."

Now you've given away 53% of your company for $13,000.

Don't take on an investor for $3,000... it is completely pointless and you are giving away the farm. Take on an investor when you need $50,000 or more, and you already have sales so you can present a realistic valuation and revenue growth trends.

I've been doing this a long time and have raised more than $5 million over the years, there are reputable VC's, and then there are sharks... sharks deliberately give you less than what you need because they know you're going to run out of money and come back to the table, at which point they take a bigger percentage. But for the amount you're talking about, you don't need a venture partner, you're just giving your company away.

Thanks for responding. Certainly given me pause to consider.

The reason I am considering taking on this investor is because I would like to work with him. His strengths are my weaknesses and vice versa. I think a collaboration would be both fun and benefit the business. Plus, I really don't think there would be drama. We have worked together on other projects for about a year and it has been a pleasant experience for us both.

That said, I am aware that as more money gets involved, a smooth relationship can get rocky - fast. Is it on me to draw up legal documents regarding the investment to protect my business? I don't think so.

Some quick research shows that the onus is on him to prove I owe him something and what that is, rather than the other way around. The incorporation, bank account, registration etc. are all underwritten in my name.

Maybe I am looking at this wrong, though. I want to work with him, so my natural bias is to find reasons to make it doable rather than give weight to issues that would steer me away from it.

For that reason, I'm not going to do anything today. I'm going to let it roll around in the cavernous vacuum that is my head overnight and come back and read the input you kind folks were nice enough to provide. I did ask for it and want to give it the weight it deserves. Hopefully, rereading tomorrow will provide more objective clarity.

Thanks again!

Objectively, I know this is valuable advice and I should heed it.

I think the flattering boost from getting two unsolicited offers to invest was a bit overwhelming and clouded my judgement. Thanks a lot for bringing me back down to pragmatic concerns. I need to be smart, not flattered, and certainly not idyllic in my trust.

The valuation prospect is a bit of a puzzle to me. It's easy with my established businesses. Projected growth and income on a business not yet launched seems very flimsy to me. It could bomb, it could see wild success. Since it is nothing but a business plan and incomplete website now, a $24k valuation seems low and high at the same time. Advice here?

Because I do want to work with this particular individual, the prospect of a partnership intrigues me. Breaking down the responsibilities and stake of each explicitly might work. I think I'll do some research on this path. I'd be willing to split the legal fees to clearly cement the specifics. He seems more casual about it all, so we certainly have some conversations ahead of us.

Thanks again for the reality check.

lol wut

"protect my business"

I have experience in receiving investments and capital before, so I can hopefully provide some insight to you on this.

There really is no "standard percentage", it is all about negotiation. I had a $50,000 investment into a company of mine in 2003 and if I recall the percentage I gave for that was around 6-12%.

The *real* thing you must be on the lookout for is this: Look out for any way by which you can lose control of your company! Make *certain* that if it is an investment, there is no "pay back" clause. An investment should be just that, an investment. A loan on the other hand, is a different matter entirely.

Make sure you have a lawyer review any contract ahead of time, and don't let the excitement of success blind your judgment. If it sounds a bit scary, it probably is!

Some of your specific questions:

Is there a standard time limit for an investment? Generally, if they invest they permanently own some percentage of your company. They own that percentage until either they sell it to someone else (Be mindful of the fact that they CAN sell it to someone else, and that "someone else" may not deal with you as favorably as they).

Do decisions remain my sole discretion? There are different kinds of "interest" in a company, controlling interest and mere profit share interest. If they own a percentage of controlling interest in your company, then yes they have influence on the decisions. However, even if they don't have controlling interest, they still have leverage. For example, if you make a decision that harms their ability to profit, they could take you to court for that in certain cases. Again, consult a lawyer.

Does the term profit mean after my salary or before? This is purely up to the two of you, that is what negotiations are for. Just make sure that what ends up in the final contract is what you actually agreed on.

How much transparency is required? Same as above. It is whatever is required according to the contract you sign.

Bottom line: Get a contract and have it reviewed by a lawyer before you do *anything*. Whatever is in the contract is what counts in the end, and will overrule anything else the two of you may have discussed and will also overrule any "standards" that may exist.

I really appreciate the wealth of information being shared here, and the time you're taking to share it.

Something that is plaguing my decision making process right now is this:
If in five years, that $3k has made them $300k then yes, I have undervalued the deal. However, that circumstance also means I've made nearly $3 million. Whereas if it bombs, I'm not the one out that $3k.

Please keep in mind that I make a decent living with my current projects, but I am by no means a millionaire. I don't want an ego and chance of success to make me turn away something that could really help - just like I don't want the flattery and desire to work with him to keep me from making smart decisions.

I'm finding it hard to verbalize exactly what I'm trying to say here.

If this was one of 100 projects on my horizon; if my net worth included lots of zeroes, my decision-making process would be different. I am still in a place where $3k and a savvy resource mean a lot.

I'm concerned that over-valuing may be as big a concern as under-valuing. The worst case scenario still kind of seems like a win/win given my current place. I mean, for him to end up making out like a bandit means I'm doing damn well. Am I really in a place to be so scrupulous? I don't really think I am.

I do think we both need to make sure everything is clearly laid out and legally binding, including his non-monetary contribution. That resource and $3k though, I think is probably fair for 10% (I'm going to try to talk him down to that.) If things go wildly well and we both make a ton of money, there are worse problems to have than making his investment a fantastic deal for him.

Please feel free to let me know if I'm thinking straight or not ... not that most need the permission.

That's a really excellent point that I hadn't even considered. You've been a great help! Thanks a ton.

I could shoestring the start up myself in the same way I have before and not need an investor unless and until it takes off, at which point I'll have real figures and growth to show.

Still, I think it's more likely to take off, and faster, working with this guy.

I turned a $22 investment into a $50k a year profit in the past 13 months. Not that this is a guarantee of future success, but it makes me wonder if I'd be pissed to give up 12% of that now or if it would have paid off in faster, bigger growth.

Regardless, your point of really growing and needing that share later is received and appreciated.

My mind is spinning viewing this from so many different angles now. Lots of decisions to make; at least I'll be making them with a greater perspective now. I'm so glad I asked here and can't thank everyone enough for your input.

If you don't need the money, don't get an investor.

The only exception would be is if you really need this particular person's contribution to grow the business, then give him equity (or the option to buy equity), is a way to get him on board or incentivise him.

Think about it this way...

Realistically, with the resources currently at your disposal, how much do you think this business will be worth one year from today if you don't take his money? Don't answer it here, just think about it and be as honest with yourself as you can.

Now think about it again, but come up with the number you think it will be worth if you do take his money.

If the numbers are the same, you don't need him. If having him involved = more revenue, you can calculate exactly what his ownership should be. Finish this equation (X is the number you came up with):

(3000*100) / X

The result is the percentage of ownership $3,000 will buy him.

Never issue a % of a company to anyone. Issue #of shares or units so you are freed up to dilute going forward.

You've received some monumentally bad advice so far... LOL

First, what you plan on earning has zero relevance to what
the business is worth today. Today you have zero revenue.
So the value is purely speculative. You either need the capital
or you don't. If you don't, what's the point? Don't do deals just
because you like someone. Business can turn bad at any moment.
Where will your friendship be then?

Second... if you think you might move forward please DO NOT consult
a paralegal. You need legal advice on the type of financial arrangement
you put in place as well as the rights and responsibilities of the parties.
Paralegals can not provide that and any decent contract lawyer will provide
consultaton for less than $1000.

Also... please do not do this on your own without competent legal advice.
That would be the most foolish thing you could do. Whatever a lawyer
charges will be cheap compared to what could happen if a dispute arises
over a poorly drawn contract.

Serious business owners have two people on speed dial... their lawyer
and their accountant. Don't try to save money and end up losing far
more than you'd have paid to avoid problems in the beginning.

Finally... there are always well meaning people willing to give opinions
on legal matters on internet message forums. Resist the temptation to
take any of this advice seriously.

Be smart. I don't care how many times they may have done something
"like this." Unless their circumstances are precisely the same as yours their
experience means next to nothing.

Did I say be smart?

The two biggest issues discussed here seem to be 1) Is a legal contract drawn up by my attorney and agreed upon by his necessary and 2) Do I need an investor?

The first is pretty easy. I'm definitely convinced this cannot be a friendly conversation and an email. If it is done, it will be done correctly.

The second is a bit less clear. I can launch this by myself. I can launch it better with his expertise and money.

I'm going to give the formula RonRule threw out there a run and see what I come out with.

Finally, as much as purely analytical business people will cringe at this, I listen to my gut. It has served me well in the past and I won't ignore it now. That said, my brain reserves veto power over my belly.

Maybe it's because I'm a guy. Maybe it's just me. But, twice you've mentioned being flattered by this guy's interest in investing money and knowledge in your start up. Whether it's personal or business flattery, in this case I'd take the intellectual choice over the emotional choice. Here's an example:

I know a business woman (web designer) who had all kinds of extra hell (and I do mean hell) when she was divorcing her husband/business partner - after a pretty long marriage. Of course things were good when they started. Long story short, he wanted all sorts of monetary compensation for his "expertise" consulting contributions to her business. So, not only did she have the extra legal hassles from his claims, she had to deal with his emotionally putting the screws to her, as in the "Without me you'd have been nothing" angle. (She was the designer and client getter and maintainer.)

Of course both parties should have their own lawyers so the agreement does not end up favoring one party over the other, and you cover things you did not/could not even think of - such as tax advantages. And, please make sure your lawyer actually has experience in the field of your endeavor. Client Review Ratings

Finally, IMNHO, find some non-ownership giving up way to compensate this guy for his knowledge base - bonuses or dividends (if that's the right term)? You don't need the $3000 and if it takes off, that would be a small amount compared to giving up control of your company. You'd likely be kicking yourself.

People get weird when they are part owners of companies -regardless of actual rights. A friend almost had a prominent local lawyer (of all people) as an minority investor in his company. It looked good and was very exciting until she started talking about the condition of putting in her guy in as CEO of the company if she invested, etc...

It was business flattery. This all began a couple of years ago with everyone thinking I was crazy or just humoring me. So, to have two separate successful people offer me money (without my asking) does make me feel like I've done something right to impress these people. Maybe it is silly, maybe I shouldn't care about that type of validation - but it does feel nice even if it shouldn't. That I have particular respect for this guys business acumen adds to that feeling.

Pretty much everyone who has been generous enough with their time and knowledge to comment in this thread thinks it's stupid to give away a percentage of the business. Despite my leaning toward wanting to, I have got to give such unanimous opinion real consideration. Especially since every time I check the thread someone has exposed another reason it's a bad idea.

A couple of alternatives have also been offered. Because I really do want to work with him but selling him a percentage seems to be a bad idea, perhaps exploring other ways to work with him is the best option.

I really need to do some research exploring these suggestions, alternate possibilities, and safeguards. Thanks again for all the help.