The company is 5years old with a stable revenue. It has already existing products and projects. I pitched the new product to a potential investor who is interested to invest. But, I'm looking to bring in investment for this one product and revenue share on this product and not give out company's equity, where the investor would benefit from the whole company's revenue.
I have done some research to how this has been done by other companies and this is what I found out:
Option 1: Joint-Venture or Partnership Agreement with the Investor's Company.
Option 2: Open a separate company where the Investor would then inject the investment and I would be either partner or my company owns part equity.
I would like to know the best strategy of inviting the investor and knowing the pros and cons of the proposed strategy.
I think Option 2 would be more attractive to me if I were in your shoes. I may open up a subsidiary of the parent company where you maintain your equity control. You draw out a contract with the investor stating they help you grow out a new product with x amount of capital injected by them and you may meet them 50/50 on the injection. You may not, however you give them a time table for their exit so they can make their money back plus profits. You contractually obligate them to sell their shares of the subsidiary to you when they hit a certain valuation mark. They walk away richer, you dissolve the subsidiary and roll whatever product you made together in your parent company stable. Also, you can convince the investor that your existing market reach will help sell the product faster. You don't want the investor to own equity in your established market power and brand, only the product. You can also scrap that subsidiary and write in the term sheet that after they buy in to the parent company, once it hits a desired valuation at x amount of years, they have to sell the shares back to the company which you may opt to take partial of full control back. But you keep the investor off the board of directors of your parent company, by electing to do the subsidiary which is probably something you would want also. Hope it helps.
Good insight. Personally, if it is just one product amidst numerous others, I think you are definitely thinking wisely so far. My first thought was as the other poster mentioned, treat it as a loan with a much higher ROI than he would get in a more traditional setting.
However, if this investor brings value behind his dollar investment (industry connections, knowledge, experience) he could be a valuable asset that you want to keep around much longer than any final payment under a loan type structure. If that is the case, you could always register a separate LLC for this product and bring him in as a partner with equity. You just have to look long term and figure out what lines you don't want getting crossed. With the loan structure, you also have to keep in mind, he may love that idea, or he may feel like you are trying to cut him out of long term profits. The better way usually to structure that type of deal is to be advertising that from the beginning, so the investor forms his/her interest knowing the structure of the deal. If it were me...personally as to make sure I did not run the risk of offending the investor, I would probably take the LLC partnership option and the loan option to the table..IF you are set on this investor. If you have other investors lined up and you like the loan approach then nothing wrong with presenting it as "This is what I am offering." I just can see where if the investor has gotten excited about becoming a part of your product or company, and you hit him with "Ill structure the deal as a high interest loan and once we repay you, you are out of the scene." it could dampen his/her interest or insult.
Also the above is assuming this is an angel investor and not an investor who will require a board seat or two for the proposed investment. Trust your gut.
You may be making it more complex than you need to; first answer the question “why do you not want to give an investor equity?”. Usually it’s one of two reasons — upside or control. But an entrepreneur cannot take an investors money and not want to give them value in return.
The easiest way to give the investor an equity like return without control is to give profit interests in an LLC. If you start creating more complex structures, you will just scare off the investor with your apparent intent.
Check out https://intelliversitycampus.org/royalty-funding-coming-strong/ which covers how to do a straight investment in which an investor pays you up front for a royalty on the gross sales of the product for a certain term your product's royalty stream. This is not unlike how movie royalties work. You don't need to set up a separate company to just do revenue royalty-funding, you just set a % of the gross on that product line. Your investor will want to be sure that you are reporting the full income, but other than that there should be no complexity if you find an investor who is happy with a royalty in the product stream, instead of equity in the company. Alternatively, if you take debt you give up no equity. Since you have 5 year track record and stable revenue, that might be an alternative you might want to choose instead.
Treat it as a business loan and structure the payment interest of the loan in line with your 'revshare' model
Gitanjali, He answered the question of why he does not want to give out equity in the post if you go back and re-read. He does not want this investor involved with the revenue sharing of other established business. He is not making anything too complex. Quite the contrary, unlike most entrepreneurs he is actually thinking through a situation with business acumen and good for him. His line of thinking is actually well positioned to avoid making the situation complex.
Using a separate company may prove better.