So I may be going in as an investor on a software application - any suggestions?

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NormanNormal

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Mar 5, 2008
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The idea is solid. However I've never been an Investor of this type or delt in "venture capital". When at the negotiation table, what is appropriate to present for a profit sharing / ownership percentage? I'm just not sure what is typical in these types of deals. I will be putting up almost 100% of the money for development and marketing. I am thinking something like 30% of the future profits for x years. Or % of ownership of the software.

Suggestions from others who have done this kind of thing would be helpful.

Thanks

Norman
 


NormanNormal said:
Im not exactly sure, I have a meeting tomorrow to discuss it. It should be less than 50K for sure though.
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50K is more angel territory or start up incubator as opposed to a more traditional venture capital investment amount. Most big cities will have a community of angel investors, find one from the directory below and contact one, you maybe able to get some base line info on standard terms.

Angel Capital Association

Whatever you do, I wouldn't give the dev an earn out after x years, you want equity until exit.
 
NormanNormal said:
The idea is solid. However I've never been an Investor of this type or delt in "venture capital". When at the negotiation table, what is appropriate to present for a profit sharing / ownership percentage? I'm just not sure what is typical in these types of deals. I will be putting up almost 100% of the money for development and marketing. I am thinking something like 30% of the future profits for x years. Or % of ownership of the software.

Suggestions from others who have done this kind of thing would be helpful.

Thanks

Norman
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Ideas are a dime a dozen - if you're putting in 100% of the devel & marketing money you're going to want a lot more than 30% FP.

I just talked to an 'idea man' today who gave me 3 different examples of his that someone else had taken to fruition - he was complaining how they 'stole his idea'...

Sorry dude - action is all that counts. The person who has the balls to follow through and make something work deserves the rewards.
 
NormanNormal said:
Im not exactly sure, I have a meeting tomorrow to discuss it. It should be less than 50K for sure though.
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One other piece of advice, push your meeting back a week. If you don't know what terms you are looking for for your investment you're either wasting both party's time or you're gonna get raped.
 
justo_tx said:
One other piece of advice, push your meeting back a week. If you don't know what terms you are looking for for your investment you're either wasting both party's time or you're gonna get raped.
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Well, the guy is kind of an average working Joe with a great idea. I don't think he has much experience in this either. The meeting is mainly to dicsuss the idea but I'd like to at least have a little knowledge of what I'm going to be facing.
 
So many questions before one can even come close to answering yours.

What are the funds being used for?
Who controls the bank account(s)?
Are the other partners drawing a salary?
What control functions are in place?
What happens of the entity goes bankrupt? Who owns the software (or other assets)?
What are they putting on the table? Just an idea?
Do they have a sound marketing plan once (if) the software is developed?
Do they have the ability to develop the software?
Do they have the ability to market the product?
Do they know how to run a company?
What are the exit plans?

Generally speaking though, in particular in an angel-funding type of situation, some items for your wish-list:

Do not own future profits. Own the company with a claim against the software and other assets (or the other partners' equity) if it goes belly-up.
If they're drawing a salary, take a larger piece of the pie in the initial period and until you've had a pay-back plus good value.
Get on the bank account.
Get on the Board of Directors.
Control the company's board until they've proven themselves and you've had a payback.
If its a corporation, have a good shareholders' agreement drafted to present to them.
If an llc, get a good membership agreement drafted.

And as justo tx said: know what you want before you even walk in the door.

First and foremost: Get a good lawyer. Make certain that you're protected.
 
NormanNormal said:
Well, the guy is kind of an average working Joe with a great idea.
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Does average working Joe = programmer or does it = plumber with a great idea? If he's a programmer the first question you need to answer is, will he follow through? Like crooner said, ideas are a dime a dozen. If you think he might flake don't waste your time. If it's just some dude with a good idea, don't waste your time.
 
justo_tx said:
Does average working Joe = programmer or does it = plumber with a great idea? If he's a programmer the first question you need to answer is, will he follow through? Like crooner said, ideas are a dime a dozen. If you think he might flake don't waste your time. If it's just some dude with a good idea, don't waste your time.
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Hes in the software industry. He is not a progammer. He has lined up a developer and the marketer. We are going to discuss more tomorrow. thanks for the great ideas guys.
 
Did you ever watch the show "shark tank"? If not you should watch a few episodes and get an idea of what venture capitalists are doing/want. They rarely want to do a deal if they dont have a controlling stake in the company.
Its a great show - Hulu - Search
 
If you've got a pile of money that you're trying to flip, and you think this guy is able to churn out a GREAT package with a long profitable life-cycle than follow through on the questions 'WRIGHT' posted above with the guy. Otherwise you might want to check flippa or other sites that sell ready made businesses that are profitable. Much less risk and you can extend your own marketing/buzz/relaunch into it.

OR assess the whole project, software functions and see if anything close to it exists. If so, throw up some guru.com/elance.com call outs to see what it would cost to develop something similar, and perhaps take it on in-house.

Starting from SCRATCH can def. be lucrative but there is so much room for error. I'd look for someone that had software already made and was looking for outreach/marketing money/partnerships.

I've launched a fair share of software in-house. Just finished a custom reg cleaner/optimizer software and paid 4K US for an amazing team in Romania to develop it saving me a boatload, and I own it 100%. The idea and final 'product' is but 30-40% of the equation. Packaging, marketing, scaling etc. is the hard part in my experience. I'd have to be seriously blown away by a team/software to invest from scratch, and all of WRIGHTS points would have to be filtered well in order to invest in them, and not simply outsource that shit and keep it for myself/my team.
 
If you are putting in 100% of the money than you should get way more than 30% because no one else is risking anything. Make sure the developer is working on this full time not just after work or on weekends or someone may beat you to the market with a software of their own.

As others have been saying, everyone has ideas. It's execution of the idea that is most important. Be sure that the money is going to marketing as well as development. And whatever that developer says the software will cost and how long it will take, multiply that by at least 3 and see if that will still work for you. I've used many different developers and none of them understand the full scope of the project until they actually start doing it and it always costs 3 times or more as they first said.

And as someone else said, watch Shark Tank! I love that show!!
 
You put 100% of the money and only get 30% of the action?

Holy smokes. Dude I got a whole bunch of stuff we can partner on...

OPM.
 
this doesn't sound like a very well thought out plan.

i started a software company and had an investor pay $100k for 50%.

no one can answer your percentage question without knowing an absolute ton more details than we do.

however, i would definitely always suggest getting 50% in something like this. despite what you may think of the plan, software is a risky type of business - it's an all or nothing type industry.

what's really going to determine what you'll get, is what this guy's options are. if he can get the money from other sources, then he can reject your offer. but a bank isn't going to give shit for a high risk software, and unless he's got other investor pitches in place, you have a good amount of control here. i would never pay someone for a piece of their company unless i was absolutely happy with the percentage i was getting.
 
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