What is the right equity spread to apply for my start-up?

Ashley Titus Founder at RAGS Solutions

October 7th, 2016

Getting started in discussions with the team and a potential investor based upon getting the company started very shortly (all testing and validation has been completed over six months):
1. Investment of 2,000,000 for enabling a cash flow over the first half operational year.
2. Potential revenue of 3,000,000 over the first year with a risk of achieving only 60% in the first year due to start-up learning.
3. Fixed and variable costs over the first half year is estimated at 1,483,300 followed by 695,800 in the second half to suit the estimated revenue.

Reference to the above what equity in the company should be given to the Investor who will put in 2,000,000 and also be a partner. Being a partner what percentage of the annual profits to the investor? as well as what annual interest is payable on the invested amount to the investor (I am considering that for the first six months of operation no interest will be paid?

What percentage of the annual profits (total no) would be motivation to the key members of the team?

Is it too much to lock profits for two years to begin repayment of the 2,000,000 investment thereafter?

Your thoughts would be appreciated please as this is my first start-up.

Martin Omansky Independent Venture Capital & Private Equity Professional

October 7th, 2016

Ashley: please note that my numbers are pre-money. That means that the Qatar partner's 51% would dilute my numbers by a out half. Sent from my iPhone

Martin Omansky Independent Venture Capital & Private Equity Professional

October 7th, 2016

Good luck. Sent from my iPhone

Andrea Raimondi Computer Software Consultant and Contractor

October 7th, 2016

It's also worth noting that if you want a 2M investment, your startup value should be AT LEAST in that range (or higher). If you are accounting that you could only get 60% of that 3M revenue the first year, then I'd use that number instead of 3M, because this makes the business plan far more solid in my view. The other thing is, you need to find out (I don't remember them off the top of my head) the various ways to evaluate your company value. I think there's one that is profit (not revenue) based, customer-size based, etc. I would make the calculation for all of them and then do a weighted average to get to a valuation. That will probably be seen favourably and be deemed realistic.

Martin Omansky Independent Venture Capital & Private Equity Professional

October 7th, 2016

Ashley: Our U.S.-based companies pay the CEO in options that total about 10%, vested over four years. The employee option pool is usually no more than 15%. The entrepreneur ordinarily keeps the rest. If the Qatar law mandates that the local partner has at least a 51% share, then I would reduce the employees' share and distribute bonuses (pre-equity distributions) each year based on performance. These numbers are based on growth company models.

Andrea Raimondi Computer Software Consultant and Contractor

October 7th, 2016

I thought (but I could be wrong) that cash flow was heavily based on revenue, so what you really need is cash on hand, not cash flow, for the first 6 months.

Am I wrong?

Martin Omansky Independent Venture Capital & Private Equity Professional

October 7th, 2016

You need some legal and financial advice. In general, the investor does not loan you the funds, he/she purchases securities in your firm. How much he buys is usually arbitrary, but if the investor is putting up $2 MM, it should be a major chunk. Investors usually get a preferred return - they normally get their capital back - before available profits are distributed according to the ownership of shares. This activity is based on a liquidity event - selling the company to another or to the public. This whole issue is complex and related to securities law, the U.S. Federal Tax Code, etc. Entrepreneurs need to know about these things in the earliest stages, because improper arrangements in the beginning can result in chaos and major financial losses later on. You need to talk to a securities lawyer and a CPA. Sent from my iPhone

Ashley Titus Founder at RAGS Solutions

October 7th, 2016

Great. Thanks Martin. I have meetings coming up tomorrow onward. Your feedback helps me do my analysis in time.

Ashley Titus Founder at RAGS Solutions

October 7th, 2016

Martin...I should have noted that this is in Qatar where I am a resident expat, where the investor is a local from Qatar who also will have a minimum 51% partnership in the company and the values are in QAR.

What is the right equity spread to apply for my start-up?

Financial Modeling for Startups