[drunk newfie]

Hi,

An ad company is interested in acquiring 49% of my company. They will not be paying any money up front, but they have agreed to bring in 1000 new clients within one year. They have also stipulated that all their incured expenses are to be reimbursed before profits are divided. Sounds like I'm doing them a favour.

My lawyer suggested that the percentage of ownership should be pro rated based on performance. 10 clients = 1% of company? or shall I say get me the lot or nothing?

Could use some advice.

Thanks

Jay.

[freedom.project]

I would base the ownership off of how much income you will see from each of the clients. Personal Opinion.

[Aletheides]

Thats a weak deal - thats like an affiliate getting ownership of the company hes working for.

[yourhostingspot.com]

Honestly, I had a venture group approach me and offer to purchase a percentage of my company, I told them all or nothing. I don't want to have to deal with a group in making decisions. I've heard too many horror stories. But have you asked your lawyer for his/her personal opinion? I guess it depends on how much money you can make off of the 1000 clients. But I would lean towards no. Try suggesting a percentage of the profits made. Try alternatives, they want to make money, so present other ways for them to make money off of you without getting a percentage of your company.

[David Rocci]

Jay, most equity investment deals are structured to release funds when performance milestones have been met. Your lawyer has a decent suggestion about releasing parts of the company when those milestones have been achieved. But, let's get some basics down so we can do our best to give you the most valuable advice.

What does 1000 clients mean to you? Is that 10x the clients you already have? or 1/10th? What is your business? Do clients buy once and abandon? or are they repeat customers? How long do they expect it will take to bring you 1000 clients?

You must be doing something right if you've caught their attention. Hopefully you can maximize this deal to your benefit.

-dr

[akula]

Originally Posted by drunk newfie

Hi,

An ad company is interested in acquiring 49% of my company. They will not be paying any money up front, but they have agreed to bring in 1000 new clients within one year. They have also stipulated that all their incured expenses are to be reimbursed before profits are divided. Sounds like I'm doing them a favour.

My lawyer suggested that the percentage of ownership should be pro rated based on performance. 10 clients = 1% of company? or shall I say get me the lot or nothing?

Could use some advice.

Thanks

Jay.

i've thought about the situation, and even though the way this transaction is taking place lacks the usual structure, I don't see a problem with it

1. normally, if someone wants to buy 49%, they'll send you term sheet, with a premoney valuation on your company (i.e. 100% of your equity is valued at 1mill, therefore 1% is worth $10k )

2. then, to buy 49%, they will need to supply appropriate consideration. how much are 1000 new clients worth to your business? let's say, each new customer adds $100 to your valuation. then you accept the consideration and wait 12 months. if 1000 new clients joined, your postmoney valuation will be:

[premoney+consideration]=[$1m+(100*1000)]=$1,100,000.

If the postmoney valuation is 1.1mill, and the total consideration is worth 100k, then how much equity should the acquirer get? The answer will be:

[(consideration/postmoney)*100]=[(100,000/1,100,000)*100]=9% (not 10%)

So...these are two steps to work out how much equity you should pay these people for their lead generation services.

3. Advice. Your lawyer is correct. It's a good idea to contract these guys as your marketers and pay them a % of equity for every new, longterm customer they sign up for your business. Then, as your contractors, they can send you a monthly bill and have you reimburse them for their expense in generating the customer. As consideration for them doing this work for your company, you will pay them with a % of equity in your company.

What should the percentage be (i.e your pro rata rate)? You can only determine that properly if you have a premoney valuation, a customer lifetime value (i.e. how much each new customer is worth to the business) and the resulting postmoney value.

Make sure you have these things worked out. If you don't work them out, there is no way you can work out how much equity to pay these guys per 1 new customer - and then you are likely to overpay and get ripped off. You don't don't wanna get ripped off do ya?

[mattonline]

just do a profit share, instead of ownership, see what they say?

[akula]

absolutely, good point. there is no reason to pay in equity for now (and enter into a complicated contract). hire these guys as your sales people (simple contract), and pay them a fee for every customer they sign up. once the simple contract works, then you can do the complicated one (where you have to specify all kids of things like premoney valuation, dilution rights, liquidity rights, voting rights etc etc).

after you've established a relationship where you pay them cash out of company cashflows, you can consider paying them in equity. this is better for you, because your premoney valuation would have increased during that time, and so you'd have to give up less equity for every new customer these guys deliver