[kindafishy]

Hi All,

Within the next couple weeks, I may need to start to look for an investor for a product that I am creating. I say 'may' because I am currently in negotiations with an organization to help me build the prototype. I need to get funding for this project, and I figured that looking into private investors is a good option.

I think the funding I need has to cover a) the cost of building the prototype and b) the cost of patenting the concept and design. I am guessing that the costs will be somewhere between $25 000 and $35 000 CDN.

What kinds of returns or equity should I be offering for this kind of initial investment? It is very long term since the prototype needs to be made, and then additional funding will be needed to set up the manufacturing, so I am possibly looking at a couple years until the business is off the ground - but I can't go that far until this stage is complete. In addition to it being long term, as with any new product, there is a chance that it may not get taken up by the market (but I believe it will, or I wouldn't be doing it).

Thanks!

[jasaunders]

How much have you invested yourself? What are you bringing to the table for this business, other than a concept? Once you can answer this, it will be easier to help you out.

[kindafishy]

What I am bringing to the table:

The device requires both hardware and software to be created. The hardware does not involve any brand new technology, rather it brings together technologies that already exist in a new way. I am working on a deal to get the hardware side of the prototype built, as I don't know how to do this. Even though I cannot build the hardware myself, I am negotiating to keep full control over the decisions made there. In addition, I am a professional software developer and as such, I am heading up the development side of the effort.

In addition to bringing the concept, I am heading up the development of the prototype as mentioned above, and when this stage is complete, I am going to put together a management team (including myself as CEO/CTO) and bring it to market. In short, I bring: concept; prototype; leadership and; company to manufacture and market.

Now, I am willing to give up a piece, because I am well aware that these things can't happen without help. I just don't want to give away a large piece, because as you can probably tell by the scope of what I am describing, I will be needing to ask for help (financial and otherwise) during several stages of this, so I am assuming that I will need to give up several pieces. I just need to be smart about it. That's why I am here asking questions .

[jasaunders]

Ok, thanks for the reply. In evaluating what you said, I am assuming that the majority of the funding you are seeking is for IP protection. Since you are developing the software for the prototype youself, the hardware portion (depending on what the device is) won't be incredibly expensive.

With that said, most investors will want you to already own the intellectual property before they will invest, they don't want to pay for you to obtain it. Therefore, it would be suggested that you do everything in your power (borrow from family, friends, credit cards, the bank) to fund the patent process. And since the hardware is not a significant cost, you should probably fund that yourself too. Once you have the IP and a prototype, it will not only be much easier to get the funding you need to continue, but you will be able to keep a much larger portion of the company.

Essentially, if you get an investor now, you are taking minimal risk and the investor is taking all the risk. What happens if the hardware is built wrong or the software doesn't work or the patent office rejects your application? The investor loses out. For that they would probably want over 50% of your company since they are taking all the financial risk.

On the other hand, if you already have the patent and a prototype and have done your homework and maybe have some interested parties who would buy the product, then you may be able to get considerably more funding for giving away less than 20 or 30% of the company.

[kindafishy]

Thanks for taking the time to give me such a detailed response. I sincerely appreciate it.

You are close in your assumption... Roughly half the investment was intended for the patent process. The other half is for building the prototype. The hardware will cost most of that remaining amount to build. It uses existing technologies, but there are lots of requirements and it is quite complex.

Even though the investor is taking all the risk financially, I would be quite unwilling to give up that much of the (eventual) company. I can foresee that this could very easily grow to generate a tremendous amount of revenue in due time, and I can't give away half of a company that I anticipate will do that well... not for such a small investment. The potential return would be very disproportionate.

I could be persuaded to give up a large part of the company, but it would take an investment that would essentially take the product to market, or the investor would need to bring far more than money to the table. If I was to give away 50% of a company to an investor now, just to get a prototype built and patented, I won't have much leverage when I need to raise the money for management expenses, marketing research, manufacturing and sales, all of which will obviously dwarf the initial $25 000 - $35 000 investment.

Maybe I need to try to persuade someone I know to take a double-or-nothing gamble? Would a private investor ever go for such a deal?

If I can't get funding from somebody I know, I suppose that I may have to go the private investor route though. I would rather have 50% of a successful product line than have %100 of something that I can't get out of the idea stage. It's just that if I gave away 50% (49% actually, it's mine ), I wouldn't have any more to give to bring it to the next level.

[rogercbryan]

Originally Posted by kindafishy

Thanks for taking the time to give me such a detailed response. I sincerely appreciate it.

You are close in your assumption... Roughly half the investment was intended for the patent process. The other half is for building the prototype. The hardware will cost most of that remaining amount to build. It uses existing technologies, but there are lots of requirements and it is quite complex.

Even though the investor is taking all the risk financially, I would be quite unwilling to give up that much of the (eventual) company. I can foresee that this could very easily grow to generate a tremendous amount of revenue in due time, and I can't give away half of a company that I anticipate will do that well... not for such a small investment. The potential return would be very disproportionate.

I could be persuaded to give up a large part of the company, but it would take an investment that would essentially take the product to market, or the investor would need to bring far more than money to the table. If I was to give away 50% of a company to an investor now, just to get a prototype built and patented, I won't have much leverage when I need to raise the money for management expenses, marketing research, manufacturing and sales, all of which will obviously dwarf the initial $25 000 - $35 000 investment.

Maybe I need to try to persuade someone I know to take a double-or-nothing gamble? Would a private investor ever go for such a deal?

If I can't get funding from somebody I know, I suppose that I may have to go the private investor route though. I would rather have 50% of a successful product line than have %100 of something that I can't get out of the idea stage. It's just that if I gave away 50% (49% actually, it's mine ), I wouldn't have any more to give to bring it to the next level.

I see this a lot from people trying to get started. Everything that Joshua said is 100% correct. Investors do not normally take ‘risk’ so to speak. They try to position their money to maximize returns based on a calculated and controllable set of risks. The riskier your investment the more you will have to give up. Until you have your patent and your prototype basically all you have is an idea. Idea’s are not typically a marketable product.

One thing that you could do is to get a preliminary patent approval. This would only cost a couple of $100 and would go a long ways towards showing investors that you at least have a some what marketable idea. You can do this through legalzoom.com fairly easily. This does not guarantee you patent approval but it would help.

If you are not putting in any money you should be prepared to give up well over 50% of your company. I still like the idea of you getting a loan to get all this done. If you are confident in your product then you should try your best to do this alone.

If you have to get an investor you can always try to use a structured buyback plan. This means you may give up 80% of your company for $25,000 but you will have a chance to buy back a % at a given price. So lets say you agree that you can buy back 10% of the company at $10000 per 10% in each of the first five years up to 50% back. This would mean that over a five year period you would pay $50,000 for the $25,000 you borrowed and now you would control 70% of the company.

No matter what route you take I still would recommend you try to get the patent on your own. Firstly, do to the fact that investors will be hard to come buy if you are only selling an idea. Second, it’s the best route for you if you want to control your company.

Last note 100% of nothing is still ……. Nothing

[jasaunders]

Originally Posted by kindafishy

Thanks for taking the time to give me such a detailed response. I sincerely appreciate it.

You are close in your assumption... Roughly half the investment was intended for the patent process. The other half is for building the prototype. The hardware will cost most of that remaining amount to build. It uses existing technologies, but there are lots of requirements and it is quite complex.

Even though the investor is taking all the risk financially, I would be quite unwilling to give up that much of the (eventual) company. I can foresee that this could very easily grow to generate a tremendous amount of revenue in due time, and I can't give away half of a company that I anticipate will do that well... not for such a small investment. The potential return would be very disproportionate.

I could be persuaded to give up a large part of the company, but it would take an investment that would essentially take the product to market, or the investor would need to bring far more than money to the table. If I was to give away 50% of a company to an investor now, just to get a prototype built and patented, I won't have much leverage when I need to raise the money for management expenses, marketing research, manufacturing and sales, all of which will obviously dwarf the initial $25 000 - $35 000 investment.

Maybe I need to try to persuade someone I know to take a double-or-nothing gamble? Would a private investor ever go for such a deal?

If I can't get funding from somebody I know, I suppose that I may have to go the private investor route though. I would rather have 50% of a successful product line than have %100 of something that I can't get out of the idea stage. It's just that if I gave away 50% (49% actually, it's mine ), I wouldn't have any more to give to bring it to the next level.

Yep, my whole point is that no one wants to give up that much equity or control of their own company. For that reason, you need to do as much as you can yourself without outside funding, so that later when you need outside funding to get the product to market, you can keep a larger portion of the company. You need to take the financial risk now if you want a bigger payoff later. If you can't put the investment in yourself, try getting loans from friends or family, or if not possible, try to get an SBA loan from a bank. you can quickly and easily get a $25,000 line of credit through an SBA loan in as little as a week or two.

[StealYourDreams]

Investors are blinded by greed. Feed that greed and start pitching every rich person you know. Tell them they will turn 50k into 500k in the next 24 months.

The run of the mill investor could care less what percentage they are getting just what they can make.

If anyone says any different thay dont know what they're talking about.

[rogercbryan]

Originally Posted by StealYourDreams

Investors are blinded by greed. Feed that greed and start pitching every rich person you know. Tell them they will turn 50k into 500k in the next 24 months.

The run of the mill investor could care less what percentage they are getting just what they can make.

If anyone says any different thay dont know what they're talking about.

This is so far from reality... I guess I just don't know what I'm talking about..

[StealYourDreams]

Quote: