Please help with investor contract

**bookatechie** · 12-31-2008 12:00 AM

I have a question regarding a proposal I got from a startup match maker company if you will.

They are porpoising to raise $100,000 for 51% voting shares of the company and they want $1,000 in management fees. They decided to do a management fee instead of a 10% finders fee.

I don't want to get screwed out of my own company. They are going to send me a preliminary agreement in the next few days.

Please advise what to look for. Is this a normal deal? Am I being setup to be forced out at some point when the company becomes successful? What would a reasonable investment company be asking for?

They said they wouldn't interfere with daily operations but I don't want to them to be able to just set my salary really low or some other way being stuck doing all the work and them reaping the profits.

Thank you very much for your time and advice!

**Cole Taylor** · 12-31-2008 02:14 AM

Please provide real numbers instead of xxx.xx. A ten percent finders fee is pretty standard, but majority vote is not.

These people seem to be confused as to what their role is. They are raising the money not providing it themselves. It would make more sense to ask for control if it was their money. Management fees? For what?

I'm going to go out on a limb and say these people got hold of you via one of the numerous websites that purport to connect you with investors.

Without more detail I'm going to say run, don't walk, away.

**bookatechie** · 12-31-2008 02:24 AM

Thank you for the input. I updated the numbers. I was hooked up with these people by a mutual friend but I find some of their terms very questionable.
I have asked the same question about the management fees ... no good answer yet.
The reason they said they want 51% is because their investors would want them to have a controlling interest in the company.
Basically I think they want to get 51% voting shares and then sell off X percent to investors to raise the promised money as non voting shares.

What would a normal investment company / venture capital company ask for?

**paul2145r** · 12-31-2008 04:28 AM

Well, to be honest, this sounds a lot like the new class of loan sharks that has been popping up. The shell of these businesses is semi-legitimate, but the shady contracts are binding to the point where you will be ponying up the dough whenever they want.

Your particular situation is especially interesting. I've come across a couple of companies that offer similar loans. One particular company doesn't loan less than one million dollars, is fully open to new startups, and experience is not mandatory. As with anything - if it's too good to be true, it usually is. This business uses these loans to 'clean' their money. You accept delivery of a very large sum of money on behalf of your business, keep it under the auspices of your legitimate business, and then pay it back to them in fees and dividends. Once they deem that the money has hit the 'rinse cycle', they will enact some vague clause in the contract, and force you to either get another loan and pay them back, or they will 'repo' the business, and use it for further projects, or sell it to another entrepreneur (under a new name, loaning them 80% of the funds). In the best case, you get the shaft. In the worst case, you get a knock on your door by the feds, and find out too late that you are under investigation for money laundering.

**paul2145r** · 12-31-2008 04:34 AM

Now that I can see the numbers, I am just wondering- what business are you starting that you are willing to give it away for nothing. In this situation, you are taking a LOT of risk, for not much reward. With that much interest in the company, they will prevent you from getting any of the money to use yourself, will take your business plan after you structure the business, sell the business to another company for $1, and get all of the 'magic money' back (plus the money that you paid them in fees).

**bookatechie** · 12-31-2008 08:38 AM

Thank you or all the great advice so far! I'm glad to see that I'm not the only one who thinks these people are trying to pull a fast one on me.

The next logical question is ... if I only need $100,000 - $150,000 to start with, what would be a reasonable offer from them? ... I assume this management fee is highly unusual along with the ridiculously high percentage they are looking for.

I would be OK if it is just company shares but with voting shares is there anything keeping them to just sell the company out from under me?

**paul2145r** · 01-03-2009 11:52 PM

Well, if you like, send me a copy of the contract that they are proposing and I'll give you a free consult.

**biztreaty** · 01-04-2009 02:14 AM

is the business world that cut throat-ish? They want majority %tage off the bat obviously so that they can vote you off. Thats so cold. Are there any ethics in business?

I am coming from a Comp Sci background.

**paul2145r** · 01-04-2009 08:28 PM

Well, until you get in there, you won't know how cut-throat things are. It is dog-eat-dog, and the winner takes the spoils.

This is aspect of business is less apparent in the U.S., but is very common in other countries around the world.

**terryxu** · 01-04-2009 08:53 PM

good,very good

**bookatechie** · 01-04-2009 11:07 PM

Thank you very much for the offer!
They haven't presented me with a contract yet, just their preliminary ideas.

**volcom5799** · 01-07-2009 11:19 AM

Why dont you just look up a bunch of venture capital firms and then submit an elevator pitch to each of them? I dont get the whole finders thing? check out , entrepreneur.com/vc100/stage/early.html if you end up submitting to any of these firms let us know how it goes, i am starting this stage of my companies development.

**Cole Taylor** · 01-07-2009 12:45 PM

Originally Posted by volcom5799

Why dont you just look up a bunch of venture capital firms and then submit an elevator pitch to each of them?

First, his chances of getting capital from a VC are probably 1 in 1000. Second, it doesnt sound like he even meet the requirements. VC funding, for most, is simply pie in the sky unless you're a somebody.

I dont get the whole finders thing?

A lot of people call themselves finders and for those who have previouslly bashed me telling me I dont know what I'm talking about (rlorenzen), it is a real term. In fact, it's a term the SEC regularly uses to describe those who facilitate transactions between business owners and investors.

The reason finders exist is because the majority of people dont have the connections needed to fund their venture. What do they do? They find someone that does and for that they pay them ten percent of the proceeds. If you can find someone to provide you with capital for ten percent take it.

Raising money is expensive, I'll spare you the majority of the math but once you factor in all costs you'll be looking at a minimum 20-30 percent of the total amount raised just for expenses and fees. This is assuming that you raise the money in house with a sales staff.

There's an industry out there that nobody really talks about that raises money for businesses that cant go to the bank, cant go the VC route and are willing to pay the price. Assuming you have a deal with enough "sizzle" it will cost you 40-60 percent of the amount raised, but you will get your money. These are the real finders. You cant find a sales person that will work for less than 15 points. When I was selling other peoples deals, i.e. a deal I had no vested interest in I was charging 30 percent.

Most of the deals are outright scams, but there are some gems. If you want to see one of these rooms in action rent the movie The Prime Gig with Vince Vaughn. Suprisingly it's a pretty accurate depiction of what goes on.

**Vaze** · 01-07-2009 01:56 PM

This "deal" sounds incredibly dubious to say the least. If they are asking you to pay them a "management fee" up front - it's nothing more that a scam. If they are not doing any direct investment, then asking for a controlling interest in your company shouldn't even be on the table; or any sizable equity stake for that matter

Bottom line, as others have said, run don't walk away from these guys -mutual friends or not

**EBITDA** · 01-24-2009 11:02 AM

Have you canvassed your attorney and accountant? They would and should be a great source for investors. Also, check with your local Angel Group.

As to your question of an investor selling the business out from underneath you - the answer is yes, if they own 50.1% of the equity; anything over 50%, they have controlling vote.

How much equity should you give up? Target at 30% to 35% five year IRR on the investment. You should be offering preferred shares with a preferred return of say 8% to 12%, and then warrants for some percent of the equity. Use your base-case projections and back in to the equity give-up to get the targeted return to the investor. This will require you to determine a terminal value of the business in year five. The investment IRR will comprise of: the investment (out flow), return of investment, the preferred return (either paid throughout the investment period or in a lump sum at the end of the investment horizon), and finally their share of the equity.

You should also have a Private Placement Memorandum drafted if you are seeking to raise money from individuals. Since you are seeking to issue unregistered securities, you will need to comply with Reg-D as well as any state security laws. Using a PPM will also provide you with some cover from securities fraud claims.