Paul asks “How much equity am I worth?”

I had a problem that required a database solution. I designed the concept of the database and over a 2 year period developed a crude system that worked.

In trying to find help with the programming side of things I talked through the concept with someone who had experience in setting up software systems to see if they could help create the solution. (At this point the solution was just for me not for commercial sale.)

They then went away and started development on a system of there own to do just what I wanted but with the plan to create a web based solution for commercial sale.

They have been tapping me for my thoughts on how this should work and have used my original design as the bases for theirs. It looks completely different of course.

We are now in a position of them having created a Beta version that they are trying to get investors to back and have managed to get some serious interest. I suggested we join forces as they want my input to make the idea a success.

So I have offered a financial and time investment from myself with access to all my workings and networks within the industry. I really believe in this solution and think it could be a great success.

They really want me to be apart of it but now we are at the discussion stage of what my investment is worth they have come back with a 4%.

This is based on a $10,000 investment and my time.

My biggest issue with this is they are basing there calculations on the value of my investment on what they perceive the company will be worth once they reach the point of seed funding. (They are suggesting I only pay the $10,000 at this point.) Surely all the work I have put into this already should be accounted for. It’s not like I am just coming into the project at the seed funding round.

There is an obvious naivety on my part here and I know they are the ones who have actually put all the work into creating the beta solution investing there own time and money to do it so I’m not looking to be greedy. I just want what is fair.

Any help on this would be very much appreciated.


My Answer

As I see it you have 3 connected problems:

  1. The overall principal under which you and the others are going to work.
  2. Your prior effort which was unpaid
  3. Your shareholding in the new company

How I would suggest you present the concept to them (and yourself) is to break down the issues

In Principal agreement.

Before going any further you need to get the overall boxes ticked and make sure you want to jump in with them..
It should cover the basics

  • Share split, buy in time (say 2 years to get all of your shares OR key milestones)
  • Who owns what – pre-existing IP and customer base is owned by the company and is part of the contribution in return for shares in the company. This can also be their time and effort mated to your initial thinking.
  • What happens if someone leaves (do the shares revert to the pool, stay with that person or do they need to be bought out by the other partners). I would suggest anything in the first 6-9 months is a pure revert to the pool, after that first option to buy out from the other parties … this should be evenly bought if possible.
  • Sweat equity multiplier. If there is a period of no money what is the value of shares or what is the repayment on the time invested (agree on a figure 1 month = $8K or something) and it is paid out once things pick up.
  • Sunset. What is the agreed “end goal” is it to be bought out, to publically list, to grow into a large player. This is important that everyone understands … it is allowed to change along the way. If it is a buyout, who and when is the goal and what is the minimum price so you’re all happy.

These are the key things to get peoples agreement and signature to before starting then soon afterwards I follow up with a lawyer written contract to cover the bases properly.

Share Split Guidelines

I have written this section a few times in other answers.
We typically have a few standard metrics we use to run through how much a share is worth:

  • Idea: 3% – 5% – ideas these days are cheap, everyone is having them its execution that counts.
  • Technical: 15%-35% – all developers (including myself) think its worth more but if you don’t have the rest in place then its just a cool thing that sits on the shelf being worthless to everyone. This is what both your shares will be diluted down to to start with.
  • Marketing / Sales: 15% – 30% – This is pretty important, if nobody knows about you, your nowhere … but put KPIs against it – X new customers / sales in a timeframe.
  • Business: 20% – 30% – The leadership and vision, this is typically one or two people and they will make or break the company on its own, set the direction.
  • Finance: the remainder, depending how much they put up, others adjust accordingly.

Sweat Equity multiplier

Basically your time * an agreed amount per day/week = your direct contribution that is comparable to you earning else where.

You took the initial risk and seed IP investment over 2 years while doing all the work so you take your contribution above and apply a multipler to it say 3X or 4X.

EG. Moving forward your continuing investment would look like

  • You agree that you normally get paid $5000 per month = ~$60,000 per year.
  • They can pay you $1000 per month
  • Your net contribution is then $3,000 per month
  • You invest 6 months at this rate so you have $3,000 * 6 = $18,000 your out of pocket
  • You agree that you will put a 3X multiplier on this so 3 * $18,000 = $54,000 that you should be paid ahead of the other guys in order to consider yourself equal OR this represents your buy in to the shareholding.

As the company starts to make a profit (assuming it does which is your risk), everyone starts to draw earning from the company.

The other way to look at this that the $54,000 owed to you by the company buys you a greater amount of shares in the company.

DISCLAIMER: I’m not a lawyer, just a venture developer who has done this a bit. The formal answer is pay a lawyer to draw it all up or there are websites that sell “packs” of legal documents for starting up a business.

Good luck.

Investing in a Big Data project or venture?

When looking to invest in a big data project you need to consider a wide range of issues, the following is from my experience of being a database designer, developer of large scale data driven systems and an entreprruner utilising the data.

From my experience the investment your looking at, you need to answer the following:

  • The source of the data. How do you get it, do you get to keep it. This can be a key cost factor in your business model.
  • Collection time frame. How up to date is the information your getting and keeping. This is a key
  • What does it do with the data? There are many things you can do with data and making it accessible, picking the right access strategy is critical for early adoption and long term growth.
  • How is it being monetised? The path from capturing and owning a large amount of data and making money from the data is not always straight forward, picking the right business model, supported by the three previous questions will be your key deciding factors on the success or otherwise of the venture.

Continue reading “Investing in a Big Data project or venture?”

Technology Spike – What to do about it

Big One Hit Wonder Projects

These take years to build before a benefit is seen and should generally be avoided. It is far better to develop many small blocks and start seeing value as early as you can before you get left behind.

It is also, generally, easier to upgrade and maintain the smaller blocks if they are developed cohesively but without being tightly bound together and dependant on each other in order to upgrade.

Let It Go

If you have a dinosaur technology, then continuing to invest in it or use it will just drag you further behind, and it will do so faster and faster. Bite the bullet and find or build the next thing.

Invest in the “move away” strategy before it comes time, not when it is critical or already too late.

The Key

This applies even more to your business model, methods of operating, and your interactions with your clients and suppliers. All of this is a changing environment with changed expectations and the leanest and most effective wins.

Information technologies are still just tools to support and enable all these things to occur, but it is still up to you, your team, and advisors to extend your relationships with those around you and continually seek to improve on the way you do business today.

The good part is that once you start to adopt the new models and start looking for the opportunities, there is so much made available and that will open up as a result.

Technology Spike – Isn’t Just Technology’s Problem Anymore

As information technology starts to integrate and influence other sectors like finance, medicine, education, wholesale, retail (you name it, it is everywhere now). These industries will be drawn into this doubling effect, and will be forced to either adapt or die out.

Continue reading “Technology Spike – Isn’t Just Technology’s Problem Anymore”

Technology Spike – What Does It Mean To You

What it means is something that developers are very familiar with and that most other people generally don’t want to hear.

It means that there are a range of issues that businesses need to face in the light of this growth. Primarily, your business plans, goals, budgets and thinking need to take into account the mid-term reality of change, not just the perception that it is wise to employ short-term conservation.

For the individual it means the job you did yesterday will change in the way you do it and potentially the role you play, this if you are active in learning is a huge advantage.
Continue reading “Technology Spike – What Does It Mean To You”

Technology Spike – The Trap

Previously we looked at what the spike is, and discovered that our short term perception of change lulls us into a false sense of security.

Now we look at the trap the”long range effect” creates for business leaders and anyone looking to plan their lives and careers over the next 10 years.

Continue reading “Technology Spike – The Trap”

If your financial adviser was your fitness trainer

A while ago I hired a financial consultant to help me work out how to grow the business. He was used to stock movement and retail businesses, so he did the usual “efficiency” calculations and promptly advised me to cut “a few less needed staff” like it was a miracle cure concept … I did not take his advice and let him go instead.

At the time I couldn’t explain exactly why I shouldn’t cut back on staff exactly, apart from the fact that the business couldn’t do the work without them. 

Finally, after thorough reflection, I can explain why I made that call.

Continue reading “If your financial adviser was your fitness trainer”