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How many times have you popped the cork before the contract was signed, only to
discover that your job was nowhere near finished? It is one thing to agree on an
idea, and quite another to agree on all the details that will bring that idea to
fruition. The obstacle preventing that dream from becoming a reality is the
contract negotiation. If you don’t have every blank signed, initialed and dated
by all parties in triplicate, you don’t have a deal; you only have a set of good
intentions. We have trained thousands just like you in our acclaimed
Contract Negotiation Course. We can
give you the negotiation skills to prepare for the surprises and understand how
to meet the important needs of everyone involved, so that your bubbly doesn’t
end up going flat. For more information or to Register for a seminar, class,
or training workshop Click here
How to determine how much to offer
Q: I have some people working on my company's business plan and am
currently negotiating with another company to incorporate my ideas into a
working Web site. I'm paying these people with equity. How much should I offer,
and how much should I keep for myself?
A: Every deal is different. What you offer depends on your business, the
contractors and the size of the opportunity. Your equity is your currency, and
you've only got 100 percent to spend. Every but you spend now is less you can
spend later.
You're buying goods, services and cash with equity. The equity's value
depends on the company's value. If you value the company at $10 million, then
you would offer 10 percent of the company for $1 million in services. Equity
negotiations involve valuing the company and basing percentages on the
negotiated value.
For example, if it's just you, an idea and a business plan, you may value
your company at $2 million. (In practice, $2 million would be high unless you
have proprietary technology, a prototype or some other reason to believe you're
viable.) You could then purchase $100,000 worth of goods for 5 percent ($100,000
divided by $2 million) of the company.
The problem with paying vendors in equity is you don't want your valuation
negotiations to hamper later negotiations with VCs. If you pay vendors using a
valuation of $1 million, a VC would be rightly skeptical if, two weeks later,
you claim the company's value has jumped to $10 million.
One solution is to structure the vendor's contribution as debt. The vendor
tracks time and materials and gives you a loan to cover their work. The loan
goes on your company's books as a note payable. During the first investor round,
the debt converts to equity at the same valuation the investors are using plus a
bonus (e.g., 40 percent) for doing the work on faith. Use a lawyer with start-up
experience when structuring this kind of deal-doing it right may involve
regulations and subtleties I don't know about.
Make sure anyone you pay in equity understands that their share will almost
certainly get diluted. If your round-one investors buy 30 percent of the
company, the original shareholders see their percentage ownership drop by 30
percent. Someone who had 10 percent will have only 7 percent after the investors
enter. In theory, however, you only accept an infusion of money if it helps the
company become worth enough to make up for the dilution.
As a benchmark, after your first professional investor round, you can expect
the equity to be split into thirds: one-third for the founders, one-third for
employees and managers, and one-third for the investors. Unless you wish to
reduce the founders' ownership, that only gives you 33 percent for attracting
your executive team and star employees. A CEO will often want 5 to 10 percent of
the company, so you want to be sure you have enough left over after paying your
contractors to attract the rest of your management team.
By Stever Robbins
Atlanta |
