[UpNorthPrince]

I'm starting a new Travel IT Solutions Limited Company (Pty Ltd). I've got 4 angel investors, who will be contributing U$10,000 cash each. I'll personally contribute $5,000 in cash. I'm planning of hiring 1 employee.

Summary of Key contributions (who does/will do what)

1. Technology, Marketing, Advertising, 11% Start up Capital = Me
2. Advertising, Strategic partnerships, 88% start up capital = 4 investors
3. Customer service (Sales) = 1 Employee

I'll also share a role in all key contributions such as Advertising, Customer Service (Technical) and establish strategic alliances with industry leaders.

If you were in the same situation, how would you allocate 100% shares among 6 people involved in this business? Would you please explain why you allocated x% shares to Y.

Also, is it a good idea to leave some shares unallocated for a potential strategic partner?

Your help is very much appreciated.

[stand856]

$45000 total investement
$10000 of that is 22% * 4 people that's 88% percent of stock for the Angels
$5000 from you it would be 12% of stock for you
the employee should get some % of stock while working there
that's the way i see it
I'm sure there are other ways to break it down

[akula]

to decide this issue, you need to arrive at a pre-money valuation. the rationale for pre-money is this: your investors pay a price (10k), in return they get value (share in future profits). you need to decide what this value is on risk adjusted basis (premoney valuation).

pre-money: it's a figure which gives a hypothetical value of your startup

this figure is arrived at by calculating a probability weighted average of how much the company will be worth in case of a home run, a good outcome, an ok outcome an worst case scenario (risk adjustment)

then, you and your angels will argue this figure by shuffling term sheets backwards and forwards, until you arrive at a mutually accepted pre-money valuation

you will need to defend a higher pre-money valuation by siting a range of things including; the time you've put in to find and define this opportunity (sweat equity) and the valuations of comparable startups

post-money: then, once the pre money valuation is sorted - you can get to the gritty business of cutting up the value pie, by adding the $40k to the pre-money valuation to arrive at a post money valuation, and then deducing how much ownership $10k buys each investor at a post-money valuation.

here, you need to see a lawyer because different classes of securities will have different rights attached to them

because the angels have a different involvement than executive management - you will need to negotiate with them a package based on preference shares, so you can keep a majority holding in common stock, because it's gonna be needed for round B of financing.

Further reading:
http://del.icio.us/search/?all=term+sheet&src=moz
http://brode.net/whitepapers/cap_table.pdf

To answer your question: I cannot proceed because I don't know your pre money valuation

p.s. nice to see another aussie!

[akula]

Originally Posted by stand856

$45000 total investement
$10000 of that is 22% * 4 people that's 88% percent of stock for the Angels
$5000 from you it would be 12% of stock for you
the employee should get some % of stock while working there
that's the way i see it
I'm sure there are other ways to break it down

good try, but this is incorrect reasoning. you've placed a 45k post money valuation on the company. this means you calculated a $0 pre money valuation. this is impossible because if the premoney valuation is $0, then the investors have no reason to invest.

[cokeclassact]

that akula..hes a smart chap i tell ya.

[stand856]

yea that's why i was saying there's another way to break it down
i was just going on the total money invested and not time or other things
ps where are you originally from?

[akula]

Originally Posted by stand856

yea that's why i was saying there's another way to break it down
i was just going on the total money invested and not time or other things
ps where are you originally from?

:-) Sydney, Australia...was born in Moscow, Soviet Union, can't wait to make my way to NY!!!!

Yes, you are absolutely right, there is a better way to break all of this down. In fact, everything proposed by UpNorthPrince is utterly wrong.

Decisions on capitalisation tables are completely inappropriate at this stage of the game to everyone involved in Travel IT Solutions Limited Company

To make sure that both the entrepreneur (UpNorthPrince) and his backers get the best possible deal (from every perspective imaginable), what UpNorthPrince should be doing is offering a convertible note to his investors.

The note will pay a risk adjusted interest rate (15-30%), but if the investors want to convert this note into an equity stake - they may be able to do so at a specified date, and at a specified price per share (derived from a pre money valuation)

The point: To save on time, legal costs and to protect every one's rights and interests - UpNorthPrince should be offering a convertible note (quick and easy) to his backers rather than a term sheets (hard and time consuming).

I can cover this issue in more detail if requested

[akula]

Originally Posted by cokeclassact

that akula..hes a smart chap i tell ya.

:-) thanks, but I'm probably an honorary member of the stupid club.

this stuff here (legal/venture finance problem solving), is just the result of having been trained in this area

some people do apprenticeships for fixing cars, I did mine on how to structure investment agreements and stuff

it's just a job - anyone can do it, but thanks for the vote of confidence

[Eamonn]

I would like to know who did this valuation a start up company such as this is not worth $45,000 to investors even for 300% of the company. I also think you are vastly over costing your costs of marketing and setting up partnerships. When I have done Marketing Campaigns in the past I have always costed each campaign separately and looked at needed conversion rates also tracking each campaign separately is vital so you know what types of promotion to push harder and what types of promotion to pull the plug on. I think it would be possible to set up a business like this for a lot less money however I wouldn’t want to as it seems your entering a very crowded marketplace.

[UpNorthPrince]

Thanks for all your constructive replies, good fellas. I particularly would like to salute Akula for walking an extra mile to school me on this crucial business aspect. Please do ahead and drop the knowledge. Of all the things that I had to do to get this far, Allocating shares ended up messing with my soul like Ether.

Here is how reasonable or off track I believe my Allocation could be. (Just a thought yet, no papers signed or nothing)

Allocating 16% each to 4 investors (64% total)
Allocating 16% to myself
Allocating 5% to the employee
Leaving 15% shares unallocated for a potential strategic partner (s)
Total 100%

My allocations aren't based on any sophisticated business calculations. It is simple arithmetic to make things easier. What I want is input from elites so I can weight the sanity of my decision.

I'm more of a technical geek. This "Legal/ Equity" talk is sprinkling salt on my game. I am however willing to learn and understand the talk. If I could, I'd have skipped the share allocation part but incorporating a Pty Ltd requires me to state who's who is involved in my business and the size of the piece of cake they are entitled to.

Once again, your contributions are highly appreciated.