Should I accept his investment offer?

[Oakesly]

I've just started up a new sole trader business in the last week but I also have a dormant limited company which I can activate and commence trading under also.. I wasn't looking for any outside investment to start up the business, having financed it myself with a personal loan, but I showed my business plan to a private individual who has held high-profile positions within large companies and currently belongs to a venture capitalist group and he has offered to back my business and has offered a £5000 investment for a 35% stake.
There is a catch: my fiance was the one looking for investment in his business which he is trying develop overseas; he has exhausted all other financial avenues but has potential orders in the pipe-line. He is unable to continue without investment.
The offer is that my fiance will get a £15000 investment for a 35% stake in his company only if the investor is able to obtain the same stake in my business for a £5000 investment.
35% seems a huge amount to be giving away for just £5000. On the other hand, I get a mentor with business knowledge and contacts which would be extremely useful.
I would be grateful for advice and comments.

 

[Faith28]

You have to weigh up the benefits of the investment

£5000+Mentorship+contacts; may prove to be a great advantage to increasing your business.

35% is a lot to give. But it just depends what the business is worth.

 

[RapidBI]

my fiance was the one looking for investment in his business which he is trying develop overseas; he has exhausted all other financial avenues but has potential orders in the pipe-line. He is unable to continue without investment.

If the pipeline can be made confirmed most banks would roll against it - if there is a sound plan and a profit to be made?? If not your bank manager - try another it is all down to their targets!

 

Be very , very careful

I have not only been involved in a lot of deals done for small companies, I have had a privliged view of many other deals too - and my observation is that most of the people that live under the name "angel" are sharks that can and will bite you: and are hoping you dont know the game.

My suggestion is to play it dead bat for a moment: say "you may be interested, and are considering the future" but please can he send a "heads of terms" that describes the proposed "shareholders agreement"

For one thing you will show him you understand the game- and that he wont be able to push any set of terms past you.

You see the thing is: a 35% shareholding in a private closed company is almost worthless: what gives it some value are the rules that govern the purchase ands sale, and the restrictions it places on you and your salary your rights to work elsewhere, and so on.

(For example one power you have , not that I am saying you should exercise it, I just use it as illustration, is to write an invoice for your time, convert that debt into equity, and so squeeze his shares progressively to nothing, and you can do that with a simple majority holding. And I have seen minority investors shafted just that way (not by me))

Now , he wont let you do that of course, if he is a pro.

So take a look at the terms he proposes,

And If he is a pro, you will probably be horrified by the terms - and they will make up your mind for you.

Allow for the fact that it might be a good deal too - but dont do it for such a pathetic some of money - only do it if he not only can, but agrees on paper to add value to it.

If you want to PM me any proposed agreement - i can tell you if there is anything unusual - I have seen lots of these agreements, and prepared quite a few - and I have seen a lot of the dirty tricks too.

 

[Oakesly]

Thanks Kimmrunner. I won't be able to contact him until after 4th April as he's in Canada right now. If you don't mind I will pm you when I've had a chance to discuss the offer further with him.

 

[Cornish Steve]

Is the combined value of your business and your fiance's business just UKP 60,000? That's what your potential investor is saying.

In a previous thread, someone quoted the following site if you want to estimate your company's current worth.

http://www.accountingweb.co.uk/downloads/valuing_your_unquoted_companys_shares_2.pdf

 

[bwglaw]

If you need specific advice or a quote for drafting agreements please do not hesitate to contact me at the email address below.

Jonathan

 

[cjd]

I'd say that £5000 is too little money to be worrying about and valuing your business at less that £15,000 is an insult. Keep the transactions seperate.