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Company looks like this:

investor = input money only 30% share
founder/developer (me) = input money ( about 1/2 what investor has ) and tons of sweat equity 1+ year 40% share
developer = sweat equity only 4 months 10% share
designer = sweat equity only 4 months 20% share

we have a working system, with a handful of subscribers and more every day. we are covering the expenses of running the system, and are starting to generate a small amount of cash flow.

Investor wants money back ASAP, and his share of the "exit" if we sell I dont really want to take any money out right now developer and designer want a share of the incoming revenue

what are some options around doing this ?

so lets say this:
investor has put in 20K cash
I have put in 10K cash plus work with a FMV of say another 10K
developer has put in work with a FMV of 10K
designer has put in work with a FMV of 10K

then lets say incoming revenue is $5000 in a month and expenses are $500.
$4500 left
1350 to investor (30%)
$900 to designer
$450 to developer
$1800 to me as deferred payment (debt)

so everyone continues to work, and add value ( except investor ) is that a reasonable revenue share model ? (based on percentage) should the equity ownership change for me vs. others taking money out ? should I take my share out ?

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If it was me and everyone else was taking money out I would take money too. (You will be taxed on it anyway) How are you planning to buy out the investor? What is he looking to get out of it? If you expect growth sooner rather than later might be better for you - you could perhaps get a loan based on future earnings and take his share - giving you 70% of company. To help service the debt you could also take on another investor for perhaps 10% share - you retain 60% and have some cash available on hand. Let us know how it goes. – TimJ♦ Jan 10 '11 at 6:22
Tim, Great advice about getting a loan against future revenues. Will add to the overhead, but if you can get the loan to cost nearly what the investor would be SUCKING OUT, you will be golden! – Frank Jan 10 '11 at 14:28
its not that the investor wants out, just that they will not put in more money, and are not contributing anything beyond the initial cash investment. They want a big payout if/when company sells. I control that. If I do not sell, they want money back first, then a dividend share (based on the percentage) – sysconfig Jan 10 '11 at 17:27

1 Answer

up vote 2 down vote accepted

Im curious to why your investor would want to leave after your company is launched and making money. If you feel your company is solid and has potential then you really need to scramble to either buy him out personally or find an investor to take his place.

My personal rule of value is that a company is worth about 2-3 times what it earns in subscription revenue per year. So if your company earns $4500 month it would be 108,000 - 162,000. If your investor owns 30%, he can expect to get 30% of those amounts (32k - 48k).

If you were to pay him yourself directly, you would own his 30% share. You could find the right investor, since your company is more mature, that will buy 10% of your comapny for the amount it will take to buy out your current investor.

A lot of this depends on how you structure your company. When i have worn my investor hat, I have not seeked a dividend, and have gotten nervous when a company would take out its profits to pay investors full dividends based on monthly income. My personal prefrence is to see continued re-investment of earnings. This differs based on what investor you deal with, but usually is the case for startups, and small companies.

Again, do your best to buy out your investor, and perhaps the equity you gave to your developer and designer. I think the hard lesson for you in all of this will be not to give away the house when trying to build a new business. I dont know your financial situation, or if you could have built this product without any investor or even outside developers.

If you can act as your own Angel investor, or series A VC, then you are golden. If you are the sole owner of a profitable startup, it is far easier and less complex to skip to what would be traditional series B funding (not based on amounts, but purpose). Think of investors as fuel for your engine, not the actual metal. You create the engine yourself, and investors pump in the fuel for marketing, growth, and operations.

Also, a lesson to be learned is to properly discuss an exit with anyone who invests. You dont want a hostile investor that changes their mind just when you are getting off the ground. This usually is the case with bad family and friend investments. Have a talk with your current investor and find out how much he wants for his exit. Next time, penalize investors for early exit, where they can only get the money they invested plus some small interest amount if they were to exit early.

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is paying dividends like this either to the "working" sweat equity people or to the "non working" investor, a normal thing that goes on? I understand that there is probably not a normal.. but – sysconfig Jan 10 '11 at 17:23
It really depends on the situation. For webstartups my answer would be no. Most businesses that pay dividends are usually those that are fully established. For example, lets say you need 5million to open a cadillac dealership. You have the experience as a general manager to run a store, but dont quite have the funds. Once you have the 5m, you have enough to cover inventory and to cover expenses until things are going smoothly. In that situation you could pay dividends to your investors. Most silent small investors are looking for dividends. Most seasoned or "sport" investors are looking – Frank Jan 11 '11 at 1:34
to be part of something bigger, something growing. Its very good that with a small time period and small investment you have made your business profitable. You are also at an advantage because you offer a subscription product. I personally think you have built a machine, and depending on your market, you could use investment to grow that machine to get more out of it. Reinvestment of your existing profits is a great way to achieve that. – Frank Jan 11 '11 at 1:35
A great excersise for you is to figure out how much it costs for you to get a subscriber. If you pay 1 dollar on a CPC ad, and one out of 30 visitors subscribces, then your ad cost to get a subscriber is around $30. To get fancy you could also factor operating, support, development expense, but for this example lets say you it just costs you $30 to get one Subscriber. Lets say that subscription earns you company $10 net per month. If you were to 100% reinvest, each current subscriber could afford you one more new subscriber every 3 months! You can chart this out in Excel and see that – Frank Jan 11 '11 at 1:37
the two key factors you should be looking at are: 1. Your cost to get each new customer, and 2 the total amount you can reinvest based on your profits to getting more customers. I use a similar excel chart to keep myself from pulling money out of my businesses and continually re-invest. Hopefully in your case, your investor is not pulling out because he see structural, political, or market problems with your product. It is likely he is disgruntled, has other personal obligations where the money is required, or just think he has found a better opportunity. In your case, you dont want to – Frank Jan 11 '11 at 1:39
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