Advise needed for a new venture

[sglobal]

A friend came with a business proposition and asked me if I would like to join him. The reason he approached me was primarily because of my IT skills. I'm seriously considering it but before I fully commit to it I would like to clear few things. Business is based on an app and how we're going to monetise it. He already has a business partner in other businesses he's running so I've been approached as an investor. But I don't see myself just an investor because I'll be doing a lot of work by working with the development company!
Let's say initial costs are £10k and I invest £6k and on top I'll be responsible for working with the developers, yet I'll only get 20% share! Does that sound right?

 

[johndon68]

Very simplistically, if you are getting 20% for an investment of 6K, means that your friend is currently valuing the business at 30K - where is he getting that figure from?

John

 

[menetworkjadaltd]

What are the other partners doing and how much are they investing?

 

[sglobal]

John I was going to ask the same. How can he value business at £30k when we've got nothing going right now? Apart from an idea?

They'll jointly invest £4k. One would pretty much do nothing and my friend would look at finding marketing companies etc.. and deal with that side of business.

 

[STDFR33]

It is perfectly acceptable for a shareholder not to do any work in the company. A few years ago, I held shares in Leeds United, but I never kicked a ball for them!


If work needs doing in the company, how will you be remunerated for the work? If the company isn’t generating any revenue, and in turn profits, it isn’t going to be in a position to pay you a salary – so you’ll need more shares to cover the risk that you could end up spending a lot of your time that may have to be written off if the company fails.


If the shareholder that won’t be doing any of the work is merely just an investor, I do not understand why they should be entitled to more equity.


Whatever my thoughts, however, it all boils down to negotiation.


Ps get a shareholders’ agreement drawn up by a competent solicitor if you decide to invest.

 

[Jonathan Black]

Sounds like you should ask for a bit more equity. You are bringing a lot to the table - particularly if the other investors would struggle to raise the capital to build the app without you.

Good luck!

 

[menetworkjadaltd]

It is perfectly acceptable for a shareholder not to do any work in the company. A few years ago, I held shares in Leeds United, but I never kicked a ball for them!

Did Ken Bates come up to you personally and ask you to invest 60% of the clubs initial outlay though?

 

[Jonathan Black]

There are so many other factors to consider too;

1. Do any of the others involved have industry experience - making it more likely that the app will be a success.
2. If your partners are involved in other businesses, where on the list of their priorities does this business come.
3. Your personal circumstances - can you afford to invest £6k and then likely not get paid from the business for a while, even if it's successful.
4. How good an idea the app itself is..

Plus many more!

 

[Gecko001]

You say that the business is based on an app. Who developed this app. Are they getting involved in the business venture? If so, how do you fit in?

 

[STDFR33]

Did Ken Bates come up to you personally and ask you to invest 60% of the clubs initial outlay though?

No, because Ken Bates did not found Leeds United.

My point still stands. Shareholders do not need to work in the business.

 

[NickGrogan]

If you're looking at starting an app based business with £10k for development and marketing, I wouldn't worry too much about how much equity you're going to get.

Developing and marketing a profitable app is going to cost a lot more than £10k - most apps are never profitable. Unless you and your partners are putting a lot more money in later, or have a very large customer list waiting for this app, then it's not an investment, it's a gamble.

On the other hand, if this is the next Snapchat, 20% for £6k sounds great.

 

[sglobal]

Actual budget isn't £10k and I'm not investing just £6k. Its more than that. But I wanted to keep things simple and based on the current ratio I gave an example of £10k and £6k.
App would be developed by a development company. From our side I'll be dealing with them from the beginning till the end. So the way I see it, I'm not just an "investor" I'm a "partner" because I'll be doing more work than the other partners.

 

[Gecko001]

I would do a search of this forum as partnerships (Ltd or not) which go wrong seem to a very common thread. It seems that most problems seem to be connected with not having a proper exit procedure properly defined from the start and also one partner not doing enough work.

Here are just a few examples:

http://www.ukbusinessforums.co.uk/posts/2767045/
http://www.ukbusinessforums.co.uk/posts/2766419/

 

[NickGrogan]

Ok, but from your post your friend has invited you to invest, not as a technical lead. Perhaps you need to separate the two roles.

Your investment of "£6k" buys you 20%, your work as tech lead is either paid at whatever rate you agree or earns you more equity.

If "£10k" is the development/start costs, someone needs to find another "£100k+" for marketing, which makes 20% for £6k + technical lead seem pretty generous.

What is the exit strategy and expected valuation? Without this you can't really judge the possible return on your 20% holding.

 

[OldWelshGuy]

If it is a new business, and you are putting in 60% they are putting in 20% each then the numbers don't add up.

You are putting more than both of them combined, you are also providing hands on work, so either that is paid in £££ or equity. Either way it doesn't work out unless. they have other non tangible assets to bring to the table

 

[menetworkjadaltd]

No, because Ken Bates did not found Leeds United.

My point still stands. Shareholders do not need to work in the business.

d'oh

 

[The Byre]

1. Most partnerships end in tears.

2. The 'profitable app' boom is almost over.

3. Ideas are not worth anything. (Or in the words of the song "It ain't what you do, it's the way that you do it!")

4. As @NickGrogan points out, you need an exit strategy. (And before that, you need a development strategy, a growth strategy and a profit strategy!)

5. Marketing costs at the beginning and during your growth period, are usually over half of turnover.

 

[OldWelshGuy]

great post, really is that simple.