Bruce GreigDown-to-earth entrepreneur with 2x £1m+ exits
Bio

I solve problems, one step at a time. I've built two businesses (0800handyman and KeepMeBooked) from start-up to sale (each for £1m+). I'm straightforward, analytical and down-to-earth. I like negotiating and learning about new business ideas.

### How do you discount value of common stock?

Basic starting point to value any stock is to look at the earnings that stock is likely to generate in future. Boring, mature companies generating fairly predicatable (but not fast-growing) profits might be valued at 10x annual earnings.

A fast-growing business might be valued at 20x annual profits.

Something off-the-scale in terms of growth prospects (or for some other reason, e.g. Facebook buying Instagram to stop it growing into a competitor) could see 100x or more.

If you company is not profitable, you can still do the same sort calculation, but you have to base it on some prediction of future earnings (and then purchaser takes a punt on how likely your prediction is and will adjust multiple accordingly.)

It all comes down to the same kind of calculation you'd make with any investment.

Let's say that if you buy asset X you get \$50k per year income.

So you might pay \$1m for that asset (=5% return, better than a bank account).

If someone buying your shares confidently expects to get exactly \$50k per year, they might pay \$1m for them.

If they think that \$50k is going to grow a lot, they'll pay more than \$1m.

If they think the \$50k is actually very uncertain, they'll pay a lot less than \$1m.

If your shares are somehow worth more to them than just the income stream (which is often the case) then they'll adjust their valuation accordingly (e.g. another shareholder wants control as he can then do more things; another company can make more out of your company than you can alone; a competitor wants to buy you out to shut you down; etc.)

Regarding preferred stock: Preferred stock is more valuable than common stock because the preferred stock has special rights (which would vary from one company to another, but might include rights to get the first \$X from any sale, then whatever is leftover is split amongst all shareholders; or the right to receive \$x per year in a special dividend before remaining profits are split amongst all shareholders)

Those special rights will determine how much more valuable the preferred stock is to common stock, but hard to answer any more meaningfully without knowing more details.

### How to solve a chicken and egg problems for a marketplace like Uber? What is the best way to acquire demand side?

I've built two £1m+ businesses (0800handyman and KeepMeBooked) from start-up to sale.

Provide something of value to one side or other of the marketplace first. For example:

- A mileage and revenue tracking tool for taxi drivers (Hailo)
- A place for designers to publish their portfolios (Dribbble)
- A reservation system (HostelWorld)

That way, you can get suppliers on board without them expecting any revenue from you. You are providing them with a useful tool. Once you've got enough suppliers using your tool, you can then go out and generate demand for them and turn your network of tool users into a marketplace.

More here:

http://pando.com/2012/11/20/liquidity-hacking-how-to-build-a-two-sided-marketplace/

### How much of my company should I be giving up? This is the biggest decision of my life. Please help!

I've built and sold two businesses for £1M+ each. In both cases I took on outside investors.

Do you need an investor? What would you actually do with the money he’s investing? You mention an office and adding video production, but are those things you really need to have / do? What is really constraining your growth right now? Would having an office and more money actually generate more sales? You mention that you already have two commission-only salespeople, so they only cost you money if they bring in sales, so you wouldn’t need more money to get sales through that route.

If you proposed partner is into flower wholesale and distribution, they may not really be able to add that much useful expertise to your social media marketing agency.

I’d look at it this way: what’s the worst thing that would happen if you did or did not take up this offer? If you did take it up, worst case is that you lose your business and can’t do anything about it (things don’t go well, partner stops funding, business goes bust); if you turn it down, you are at least still in control of your own destiny.

### What are your best tips for building both sides of my new online marketplace? Ideally, I'll start in one location and replicate it elsewhere.

Starting in one very tight niche (e.g., as you suggest, one geographic area) is a good idea. But I’d also add another very important point:

Build one side of the marketplace first, by providing something of value (other than the marketplace itself, which won’t exist yet) to one side of the marketplace.

For example, if you want to build a marketplace matching taxis to users, build the network of taxis by providing a useful tool to taxi drivers to allow them to monitor their mileage / fares / etc. (which is what Hailo did). You can get hundreds or thousands of taxi drivers on your “network” (=using your tool) before you even mention the marketplace idea. Then when you are ready to launch to users, you already have your supply side in place.

Or provide a portfolio service for designers, so you get lots of designers hosting their work using your service. Then offer to match people who need designers with the designers on your network who are looking for more work.

This approach is covered in more detail in this Pandodaily post from 2012:

http://pando.com/2012/11/20/liquidity-hacking-how-to-build-a-two-sided-marketplace/

### How can I request an intro to a high-profile entrepreneur/investor?

Have a read of this excellent blog post from Noah Kagan (ex-Facebook, Mint, high-profile blogger) on exactly this topic:

http://okdork.com/2013/04/18/cold_email/?hvid=O3hU5

He goes through in step-by-step detail a real email someone sent him asking to meet for a coffee and explains exactly why it worked and how you can replicate it.

### Ready to raise money from friends and family. What are the rules and possible pitfalls?

(I am not a lawyer, nothing here is legal advice, if you are unsure, consult a lawyer, blah blah. But I have built and sold two businesses, and raised money initially from friends & family in both cases.)

I'd echo what Liam has said: draw up a simple agreement to make sure everyone understands what is agreed. I've several times seen casual agreements completely misunderstood by the two parties later on. Writing it down makes you think it through, and makes sure everyone is (literally) on the same page.

The most basic misunderstanding is whether the money is equity (a share of the business, so investors may get many multiples of their money back if the business succeeds, but zero if the business fails) or debt (investors get their money back plus agreed interest if the business succeeds, but zero if the business fails).

For example, I know of two family situations where someone gave a family member money to help them buy a house. Recipient thought the money was a loan. “Lender” thought they were getting a share of the house. Move forward 5 years and the recipient wants to sell the house and pay back the family loan. The lender thinks they own 20% of the house, though, and are expecting to get their share of the house when it is sold. Big difference.

From your (business owner’s) point of view, debt is usually cheaper than equity (you only pay back some fixed interest, not a whole chunk of your entire business); but most investors would sensibly expect their investment to be an equity investment (if they risk losing all their money, they should reasonably expect a big return if things go well).

(It is possible to do both, with a convertible loan, incidentally. This is where your investor puts money in as a loan, and if you later raise more investment that loan money converts into equity at the same valuation as the new money coming in. For example, someone lends you \$50k. Some time later you raise \$500k at a \$2.5m valuation, so that \$50k loan turns into 2% of the company (50k / \$2.5m = 2%). In practice, you’d agree in advance some discounted valuation to convert the loan into equity. So, given that the early investor has taken more risk, maybe you set their valuation at 50% of what the new money gets. So \$50k / \$1.25m = 4%, the original lender gets 4%.

The main advantage of a convertible loan is it is quicker and easier to draft than a full-on shareholder's agreement. And you don’t need to agree a valuation for the business until later. This is especially important if local regulations prohibit you from just winging it with a back-of-a-napkin agreement. There’s a good summary here from Mark Suster about how convertible loans work: http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/)

But if you can agree a valuation, and your investors (and regulators) are friendly/relaxed enough to tolerate a very simple shareholders’ agreement, you could just write it yourself. I have a standard one-page document which I’ve used for friends & family rounds at my last two businesses, and it just covers four things: drag-along, tag-along, pre-emption and not-unreasonable salary.

Drag-along means that if someone else offers to buy your shares, you can force the other shareholders to sell on the same terms (as the buyer will likely want 100%, you need to be sure you can deliver them 100%, even if your other shareholders no longer like you / are uncontactable / etc.). My standard document just says this:

"If a bona fide arms-length offer is made to purchase all of the Company’s shares, and that offer is accepted by Shareholders holding a majority of the shares, all Shareholders shall be obliged to sell their shares on the offered terms so long as the terms represent no less than fair market value."
(The bit about bona-fide offer and ‘no less than fair market value’ is intended to stop you selling the whole company to your wife for \$1 and wiping out the minority shareholders)

Tag-along means that if someone offers to buy the majority of the company, they have to buy all of it (so that your minority shareholders aren’t left holding some tiny percentage of a company now controlled by someone else and they never get to sell). My home-made document covers this in one clause:

"A sale or transfer of a majority of the Company’s shares may only be made if the proposed transferee has offered to acquire all of the Company’s Shares"

Pre-emption means that your early investors have the right to participate in any later funding rounds, on the same terms as the new investors, in order to maintain their same percentage share of the business. My standard document says this:

"No new shares shall be issued unless they have first been offered to the Shareholders in such proportions as to allow them to maintain their pro-rata shareholding after the new share issue."

Not-unreasonable salary means that you (being director and majority shareholder) can’t siphon off all the profits by paying yourself a massive salary, leaving nothing for the shareholders. You agree to only pay yourself maximum of a reasonable market salary.

Those are, in my experience, the key things which will crop up further down the line and should be agreed up front. If you get to the point where you are taking professional investment, you’ll end up with a 50-page shareholders’ agreement covering a gazillion other things. But for friends & family, those are the key issues that I would suggest you decide on and write down.

### For Initial Users: Sell User License or make it into SaaS?

I built a SaaS product (KeepMeBooked) which was specifically targeted at people using traditional installed software (owners of guesthouses and B&Bs using Outlook or some other old-school calendar system installed on their PC to manage their guests and reservations).

It sounds like you are considering this problem from the point of view of what’s best/easiest for you. Might I suggest that you look at it from the customer’s point of view?

For the customer, is your product more useful as an on-premise installed product, or as SaaS tool?

(I’m assuming, by the way, that when you say ‘individual user licence’ you mean the user installs and hosts the software on their own computer(s). So we are comparing SaaS with on-premise software here, is that right?)

In my experience, almost all software solutions work better for the customer if they are SaaS: no installation issues; access from any internet-connected computer; everything safely backed up in enterprise-grade data centre; no version control problems; etc.

The few exceptions to this are typically where you need fast data-entry and rapid processing. For example, I use Google Spreadsheets for simple little spreadsheets, but go back to Excel if I need some hard-core number-crunching. Waiting a few milliseconds after each action in Google Spreadsheets slows things down too much for me.

Or where the customer is extremely sensitive about their data and won’t countenance it being controlled by someone else, however safely and carefully you look after it.

So, I’d suggest, you outline how a SaaS solution for your product would work and talk to your customers about whether it will solve their problem better than an installed product. They might not know, of course, so you’ll have to ask some careful and probing questions. As Henry Ford said, if you ask the customer what they want they’ll tell you to build a faster horse.

You’ll need to find out if accessing the product from any computer is useful to them, for example (do your customers work from an office and from home? Do they often change / upgrade their computers?) And what backup solution do they have with your installed product? Is that backup solution safe and reliable? Would your SaaS solution be better from that point of view? And so on.

If it turns out that a SaaS solution would be better for your customer, then it “just” comes down to you figuring out how to implement it.

Hosting and bandwidth shouldn’t be too much of an issue these days. There are plenty of wel-established cloud platforms (like Amazon EC2 and Heroku) where you just pay for the computing power and bandwidth as you need it, and you don’t worry about the details of the physical infrastructure. I’m no sysadmin expert, so can’t really advise on pros and cons of having your own hardware in Rackspace compared to running a load of EC2 instances. But I’m sure you can find someone on Clarity who is. In my businesses we’ve used BrightBox (a managed hosting provider in the UK), Amazon and Heroku, all of which were excellent. We also used NewRelic and Pingdom to keep an eye on everything 24/7 and troubleshoot performance / availability issues.

Hope that helps. Happy to take a call if you'd like to speak further.

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