investment, investorsI am a freelancer developer starting my own business. Since I have more than dozen regular-paying clients, one of them offered to invest into my startup e.g. to cover startup expenses (office rent, furniture, equipment, employee salary,…).
I am now not sure what to offer to him? I would not like to be rude and offer him too little, but at the same time I don’t want to offer too much.
I was thinking to offer him a share of the startup. But how much of the share as it’s a startup?
Also if I offer him a percentage of earning, I am not sure that he will accept it as he cannot be sure how much we earned. I usually use PayPal clients or freelancer websites so it’s all uncertain for him to monitor (obviously I won’t give him access to my paypal).
Another option is that I offer him some percentage on money he invested (like he’s a bank), but in such case it would be better for me to take money from the bank as its interest rates may be lower.
What is the golder rule here and where I can learn more?
EDIT
I am aware that startup means that the company will create “something” and place it on the market. In my case, startup is a new company created by myself which will employ dozens of developers to help me support all my client and shorten wait time. So maybe a startup is not the right word, but I don’t know any other.
So although there is no any product to invest to, this person wants to help me create this company by paying its initial expenses and maybe salaries for some employees. In return, he expects to get something in return.
You’re question could go in a few directions. Initially from what you are saying, he plans to invest quite a bit of money into this “startup”. There are a lot of things you need to look at when you are trying to figure out what you want to offer him.
Covering things like building rent, employee salary, equipment costs, etc is not something to take lightly. If you plan on employing dozens of employees, and want to compete with giants like Facebook and Google, you need to first look into the cost of salary. Facebook’s average salary for programmers is above 100k, which could be up to 1.2 Million dollars a year just in salary costs (assuming you are only employing 12 employees).
You need to look at who this person is and how serious he is about this. There are things that can go wrong if you give him a percentage and certain priveldges in your company, especially if you do not know this person well. I suggest sitting down and talking to him about what he expects to get out of his time at your company and what potential he sees in it, that can really tell you a lot about what his goals are and what he plans to do for the company (except pay for things).
Much like any company, you need to realize what your part in the product is. For example, I have a product that I think has potential to be a fortune 500 company (Not really) but if I think it has that much, you need to be somewhat stingy about how much you are looking to give him in return, after all, you are looking to make some kind of money out of this, and so is the person investing. Don’t feel bad for offering him a low amount, if like any business person, there is room for negotiation.
If you are currently a 2 man team and you both plan on sharing a certain portion of your company startup, you will need to forge together a legal document to make sure everything is set in stone because you don’t want things to get out of hand, or even sued for the smallest miscalculation. I believe from what you are saying, it would wise for you to offer him 30% of the company (assuming you own 70%). Doing all the work is more important than anything. With that being said, if you offer to give somebody more of the company, you are going to need to subtract it from your portion or his, depending on what is agreed upon. It will not always be a 70-30 company if it gets bigger and grows. You are going to lose some and so is he, but that percentage becomes more valuable once the company grows and catches the public eye.
First thing, i would mention is, that web dev is a product which is highly customable. In other words, it is still a StartUp and it still has all obligations and concerns coming with it. (Costs, Risks, Uncertainty etc.)
I think the best and first thing, you need to do is to talk your customer/investor! What are his intentions?
Basically there are three goals in cooperations: Growth, Revenue, risk reduction.
In terms of risk reduction and Revenue: For example, it could be, that he wants to expand into web dev or add it as a (extra-)feature to his capabilities/products. Then there is no other way to give him shares, but then he will be involved in your business.
In terms of growth, he may wants to have a strong and reliable, maybe low-price partner. In that case, maybe a lean approach is the best offer for him. Always remember, that investing into an other company comes this risks and obligations. Maybe he is not interested to invest into you to earn money, but hopes to get prioritized, quality service, support or maintenance service.
A VERY short and partial definition of lean StartUps is, that they explore their products and services together with their customers and adapt it to these customers. (Google) You are not trying to build a highly scaleable business, so shares are not worth that much (in that sense).
Summary:
Before you don’t know his intentions, you can’t tell what to offer him. I would talk to him first about his goals and visions. Then offer him, in your opinion acceptable cooperation possibilities (prepare them). No numbers included just so you find a common foundation to build on.
Golden Rule… well here a few things heard a few times (but that is all opinion based…):
Now, we could discuss about that many hours. I personally think those numbers are dependent on places, experience, markets, scalabilty and much more.
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