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I and my friend are about to get a deal to fund our B plan. This plan aligns with the expansion plans of the funding company. The deal offered is that of partnership in which we two would be having a stake + salary + a performance bonus, while the funding company would be giving the back-end support (procurement, help and assistance) + all the financial investment (we would be given a fixed amount at different points of time). So in a way, we are getting a stake for the idea and its implementation. The brand would be theirs and likewise, some terms are there; while the control will be ours. What minimum stake we should bargain to? In the salaried as well as non-salaried scenario? (Currently we are been told that we'll have 20-25% + a fixed amount per month. Also, we are been told that the expansion would be quicker than if we start on our own + they would be expanding their backend alongwith the rate at which we grow.

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I need more characters than the comment field allows ;-)

The most annoying answer possible: it depends.

It seems you have 3 goals with this deal:

  1. Entering the market (and more importantly, staying there): They need to put you into the market and staying there is going to be easy if you have the full brand ownership. I wouldn't want to let that one go so easily.
  2. Understanding the field: As long as you are doing your job, you'll be fine
  3. Money: Just be honest and open with them. Tell them why keeping the brandname is important to you. You could propose several scenarios and have a good talk about it. If you can't be open to them now, then this partnership won't last. You are going to talk about a lot of important things in the future.

The options:

  1. Full brand with minority: be careful that it won't become a customized software that you can't resell (the mistake we made). Make sure there is a way to regain majority in a few years, otherwise you'll have the brand, but no access to customers and nobody will know who you are
  2. Deciding these things at the end always causes problems. I wouldn't do this. The more you can decide now, the better
  3. The best thing for you is to get 51% and the brand name. Everything else is not as important at this point. You could make this demand and make everything else negotiable. It could even be completely their way. If they make you choose, keep the 51%. Having the software and the customers is slightly more important then the brand name. The software you build will be ownership of the company, i.e. you. If it doesn't work out between the two of you, think of a new brand name, some new colors and spread the message.

The 'it depends' is because I don't know the situation. Are you sure you need an investor? If so, does it have to be them? If so, they will have the upper hand and they might want to use it. Maybe not now, but in the future they could and probably will.

It also depends on the kind software you're building. How will your customers react to change? Installing a piece of software where the entire business runs on and after a few years do a complete migration might put customers off. If it is an relatively easy way to update, this won't cause a lot of problems. You'll have to be the judge on that.

Either way, be selfish. In the end you are doing it for you, not for them. Always be sure you keep the goal clear: get the product build and have at least 3 paying customers in 1 year (or something like this). Any proposal they make or any choice you'll have to make, just ask yourself what answer will get the product launced within 1 year and makes it more likely to get 3 paying customers?

And the one thing I've learned, whatever you choose in this situation, after a few years you realize the other option was probably better and that is ok.

Lastly: be realistic. If making this choice will cause the business to be over before it begins, just let them have it. Even if it doesn't work out, the experience you get by trying will be, by far, the best thing to get out of any failed or successful start-up. (Even better than buying your first Aston Martin V12 Vanquish)

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Thank you so much for your time.. actually i forgot to clarify: its no software, its a retail chain. Would this effect your advice? And may I please know your name and email id? Would be glad to communicate with you.. would explain you the details there rather than in the open forum.. – paekut May 20 '10 at 9:01
I just re-read your post and I have absolutely no idea why I thought you were building software. I must admit that I don't have a lot of experience in retailing, but if I can help. I don't post my emailaddress, but if you have e.g. a website, weblog or linked-in profile we can work something out. – Jeroen May 20 '10 at 11:12
ok.. please gimme your link, i'll add u... – paekut May 25 '10 at 5:36
up vote 1 down vote

It depends on how important this idea is to you. Either way it will no longer be yours.

If this is your idea, at least 50% in a non-salaried scenario, so that it stays your idea and you will need the income when this deal is over. Their 25% in a salaried scenario seems ok, but it is difficult to say with this information. I read this as if you are going to be employed by the other company but with a different way of getting paid.

Their first priority is getting their money back, get profit and expand their business. Every offer from their side has this as the underlying reason. Be careful with these kinds of deals. (This is a generalization, I can't judge your situation).

That said: If you want to be on your own, then be on your own. Getting a partnership like this might sound great, but in the long run it probably will make it more difficult for you. I did this with my first business and I won't do it again.

Is it an option that you build this and then make the investor you launching customer?

For now you will have an income (good thing), but no brand building and no feedback from the market. After this deal is over, then what? There isn't an easy exit-strategy. You probably have to restart from scratch, but you have a good idea right now. Will you come up with an idea like this in 3 or 4 years?

Also, we are been told that the expansion would be quicker than if we start on our own + they would be expanding their backend alongwith the rate at which we grow.

And you believe this?

You should make it clear for yourself what it is that you want. Risk or a few years of safety.

If it it safety you are after, when do you feel safe enough? You need to eat, drive, live and safe some for later.

If you want to build this idea into a viable business, estimate the risk and see if you can and want to handle it.

Good luck.

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What in the case when we came to know that this VC funds businesses in this way only... What in a case when we want to enter into the field and know the basics... What in a case when we are thinking of proposing to him that link the stakes with profit/sales benchmarks... Or we ask for full brand ownership with a minority stake...?? Or we ask him to first fund the prototype and then decide the benchmarks?? – paekut May 19 '10 at 12:03
up vote 0 down vote

I personally feel you are just giving your idea to them and in turn they are paying you for your share of the idea and then they are paying you a salary for the development work which you are doing. When you do something of yours why do you need to use their branding?

Second when you have 25% of the share how can you control the management decisions? Also when you got convinced for the branding thing they might thought that you can get easily convinced for other things.

So you'd better think about how fast you can reach in to the market and then analyse the situation and compare it with what they told and see what they are paying and your share is worth enough for your future when you go to bigger investments.

If I were in your position I would have gone for other decisions.

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