Ownership structure and investor

[pandacrystal]

I have a investor who is going to fund my project, which will probably take $1-$2 millions. He agrees to provide all the funding this project needs and he wants 50% ownership of this new company. And my partner and I will split the rest 50%.

Is it a fair ownership structure? I have no idea. But I have a friend who is in cosmeics industry. Her investor totally fund her project and she has 70% of the ownership. Please let me know your thoughts

Thanks

Crystal

[akula]

crystal, this is a question about premoney valuations

basically, equity splits are defined by premoney vals

if you think the 50/50 split is unfair, you're gonna have to tweak the premoney

do you understand what i'm talking about?

i know, my explanation is rather curt

to answer your question: "Is it a fair ownership structure?" It depends on the premoney (and a lot of other things like investor/investee expectations, peer analysis, LP mandates)

[pandacrystal]

akula, thanks for your reply.

But honestly I am not sure what you meant by the premonty valuation....I think I am going to do some research on that before I negotiate more if the 50%/50% is unfair.

But is a 50%/50% onwership structure pretty normal or typical for a 100% funded startup?

Thx

Crystal

[akula]

akula, thanks for your reply.

But honestly I am not sure what you meant by the premonty valuation....I think I am going to do some research on that before I negotiate more if the 50%/50% is unfair.

But is a 50%/50% onwership structure pretty normal or typical for a 100% funded startup?

Thx

Crystal

sure..try to read up about how premoney works

that's what you're gonna need to negotiate your self a better deal

as far as "is a 50%/50% ownership structure pretty normal?" goes; no, not in my experience

equity investors, in seed stage, series A/angel round, pre revenue situations ought to retain at least 51% of the voting power and keep the option to kick the founder out at moment's notice...money burns holes in the pockets of inexperienced founders who don't have skin in the game...founders with no revenues, track record, or their own cash in the company are generally unpredictable, hazardous and inappropriate to have as equal partners..

simply put, founders ask for an inordinate percentage of ownership for two reasons: they hike up premoney to unreasonable price or they overvalue their sweat equity contribution...when these problems arise, investors need to tell the entrepreneur what they think and drive the % ownership to a lower level...but not too low or the founder isn't gonna be motivated

all in all...for these reasons (i.e. asymmetric motivations between the investor and the founder)...investors should never, ever, buy equity in pre-revenue, concept stage, low tech kind of shops. these deals must be done by way of convertible notes

and likewise, founders shouldn't let these investors buy up their equity for pennies, rob them of any control, and leave them hanging on a wing and a prayer that they're not gonna get fired...for these reasons - founders must insist on convertible notes

[pandacrystal]

so you are saying, even if 50/50 is relatively fair, it should at least be 51/49 so one party has the majority of the ownership and the power to make final decision.....Am i right?

[akula]

yeah, absolutely

if the power is distributed equally, what happens is wwIII

look...to make sure the startup process goes smoothly, founders need to understand the reality of what's going on

the equity they are selling is a the lowest grade security available in the financial markets...it's more speculative than buying crap shots at the casino...in the casino, at least the investor would roughly know the odds of sucess and failure. with prerevenue, concept stage shops even these parameters are totally up for grabs.

so, in that sense, given this reality, founders need to be comfortable with their monirity stake, because given this reality, investors can't accept anything less than a majority holding. if the founder is not comfortable with minority, the startup will break down. it is impossible to work with founders hooked on a misplaced sense of entitlement....however, if the founder keeps her 100% ownership, sells some convertible notes instead, makes some revenue, retires some debt and then sells some equity at a higher premoney val - she will have the bargaining position to retain a majority stake

when you become sucessful and do your own investments in startups, you'll see exactly what I'm saying and you will agree with it