Deal: Outsourced Product Dev - proposes 12% vested equity for $15k discount + free branding & marketing. Should I accept?
The product dev studio I am outsourcing the initial development to is happy to give a discount of $15000 for 2 years vested equity of 12%. They will also help with free branding and marketing efforts totalling to 95 hours. Plus key contacts with investors and partners.
The studio group is credible with good clients list and second time entrepreneurs.
A going rate for early-stage accelerator programs is usually about $50K for 5% equity, valuing the promise in your ambitious powerpoint presentation at $1M. This would translate 12% into $120K, which works out to about $1,200 per hour for 95 hours worth of work.
It's not uncommon for an agency to charge anywhere between $100-150/hr for consulting services, which closely correlates with their offer - $15000 worth of work for 95 hours works out to roughly $150/hr.
If you accept their deal, you are overpaying them by exactly 800% per hour of their work.
Unless they poop gold bricks, I wouldn't even consider this deal.
As tempting as this is, I would not do it! If your company grows to the heights you hope it might, you will have given away potentially thousands to hundreds of thousands of $ for 95 hours of work. 12% does not sound like a lot - but it is.
Try to fund your business costs some other way and retain equity for as long as possible.
Try to get someone to help you assess the value of your company to enable you to make sound decisions i.r.o. debt funding, venture capital, investment, share sales, etc.
All the best,
It depends. Please contact me if you want some advice!
It depends are you capable for doing that work yourself? Do you have the $15,000 available to pay for the service? also what do you estimate the value of your company to be in 2 years time?
I would certainly define what you get in terms of deliverables or outcomes, not hours (and certainly not discounted hours). If they want an eighth of your company, they should commit to some measureable outcomes.
100% of nothing is exactly that..
$15,000 is not a lot of money for a good concept, I would try to raise the funds, and see how much equity an investor is asking for (usually more than 12%) and then you can compare both options intelligently.
Third option would be to consider bootstrapping this venture, I am a big fan of bootstrapping and holding as much equity as possible, if you believe in your idea, you should have no problem coming up with 15k in credit cards, second mortgages, etc...
Best of luck.. ;-)
The deal seems to be promising yet you need to be concerned about the time period. Try to negotiate for at least 3 years. Go for it then.
Great Ideas come one in a life time , but investor with different deals come and go. I hope you will think what is the true value of your idea in the long run,and what part will you be playing in this idea after this deal!
And as Steve Owens said , get a advice from the a corporate attorney
Is $15000 a substantial portion of the initial development expense?
I would suggest that should you make a deal, make sure it includes a long term discount going forward. Perhaps 5% - 8% would be appropriate?
Others will have a better feel for this, but I believe the dev studio should not end up with a higher class stock than you have. I would think that sort of thing should be reserved for hard cash investors and you will want to protect future investors from this transaction.
Means to say.
$15000 + marketing and brand promotion + credible contacts ( means potential customers and Investors.) For 12% stake.
I think you should grab this offer.
Since Idea is something but not everything.
For converting an Idea into a Multi million Company, needs a good and experienced team who supports you and your Idea.