Questions

We are a bio med start up with two products at the moment, both are in the final stage of development. We received a proposal from the investor: 75% for 2MM. What should I focus negotiation on: the increase of amount to be invested or reduction of his control? Any insights & examples are appreciated

I am not an attorney nor an accountant, and this is not "professional advice". Let me begin by saying that I agree completely with Mr. McGuire's response. At his very affordable rate, you should have that call with him. $200 is nothing, absolutely nothing, as a tax-deductible expense to protect yourself from this and future similar situations.

Yes, I am advocating having a call with another expert. I haven't done this before. The quality of his statements here demonstrates to me that he has knowledge that you badly need. And it is better organized in this department and more affordable than my own.

When you say "the investor", do you mean they have already invested money in your startup? If so, what % ownership do they have now?

If you were on Shark Tank, and a Shark made this offer, they would be attempting to take full control. The valuation of the business they're stating with this figure is $2,666,667 ($2 million/0.75).

Does that seem right to you? It doesn't to me. Does it seem right that they want to buy a non-liquid $2.67 million for a very liquid $2 million? And that's it? No, they're trying to get a deal on the company and full control out of you. They know it is worth far more than this.

They can boot you once they have 51% of the shares, you know. Do you want to become an employee, and therefore be at risk of having your employment terminated? Then take this deal.

NEVER give up even 1% of ownership if you can avoid it. Don't take my advice on this--read How To Get Rich by Felix Dennis. Mr. Dennis was richer than you and I together are likely to ever become, and did not need the money from sales of his book.

My impression is that you've gotten excited by the prospect of $2 million. If that's your exit strategy and enough for you, then make sure the money isn't directed for investment into the company but rather for you directly.

If this deal is structured correctly for you, I'd also secretly plan to sell 100% of the shares you own eventually to divest yourself entirely from the hassle. Speaking plainly, after the takeover I'd have nothing to do with the company unless they pay you dividends as a silent shareholder, or pay you consulting fees for your expertise. After the sale I wouldn't give them anything for free. I wouldn't take a job there. Too much potential for drama. But that's me.


Answered 8 years ago

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