Chang HanCo-founded, invested in & consulted for startups.
Bio

I have mentored business owners, executives and managers and entrepreneurs through programs such as EIO, BCIC's New Ventures BC, and e@UBC and have provided lectures, workshops and seminars on Intellectual Property, SEM/PPC, LinkedIn and startup business management at BCIT, SFU and UBC. Every startup and quickly growing company needs a Chief Strategy Officer, but most can't afford to hire one. I provide an outsourced Chief Strategy Officer role for owners and Boards. My project scope and deliverables are based on a simple 10X model: I guarantee to bring ten times value based on an agreed metrics & milestones. My role normally involves corporate counsel and intra-preneur. I love litigation strategy and creating intellectual property portfolios, the online sales and marketing campaign strategy, and executing for digital marketing and especially sales campaigns. My clients typically have between 4-125 employees and/or $200,000-$6,000,000 in revenue. Specialties: International Law, Google Adwords, PPC, Online Marketing, Management Science, eLearning, GxP, Intellectual Property, Litigation, Business Entities, Franchise startup & expansion, Startup fundraising.



Recent Answers


The best source is by being referred by someone you trust.
If the people you trust can't directly refer you to a lawyer who can draft a contract to give to an investor, then they can refer you to someone who CAN refer you.

Writing a contract "to give to small time investors" could be a simple non-disclosure that is not meant to be enforceable, given to 2 investors potentially putting in less than $50,000 each, OR could be a full set of investment documents - private placement memoranda, subscription agreement, share purchase agreement, etc. given to 5 investors in order to invest $500,000 each (which would be considered 'small time' from the perspective of later stage VC's).

If its the former, its going to be inexpensive and almost any lawyer - and many non-lawyers - can do it.

If its the latter, its going to be expensive and you really want someone who is experienced and knowledgeable in this area FOR YOUR JURISDICTION.


No.
Absolutely not.
But they should.
If they want to stay in business and be able to continue to service future immigration clients who are able to pay.


No.

There's not a good template you can refer to, as there is not one single right way to do this well.

Putting aside jurisdictional variations on how the rules for partnerships and corporations (or limited companies, depending on where you are), there is a simple and effective way to do what you want to do.

Sit down with this designer, and go over these important details:

1. what is your business currently worth?
While this can be a 'big' and complex conversation, keep it simple. Review all major assets the business owns, and look at the past year or two of revenue and profit for a benchmark of what to expect for revenue in the coming year(s). If there are special circumstances that may change next year's revenue from yester-year's - i.e., a lucrative new contract, a potential new distributor, etc.), then discuss how that changes the projections for revenues going forward. Go through this same analysis for profit (which requires reviewing your costs).

2. agree together what your business is worth today, and what it will be worth in 1 year, 2 years, and 5 years. Write this down, including the specific reasons why you (two) think so, from 1, above.

3. what is the designer's contribution / work going to be worth?

agree on an hourly rate along with set number of hours per month he/she will be putting into the business, OR agree on specific deliverables (focus on results with metrics rather than broad descriptions of what you hope will result from his/her efforts) - and then put a dollar value on those delivering them. IMPORTANT: write down what the cost to the business (or to you) is IF each deliverable is NOT delivered. This will be deducted if not fulfilled - and not more, nor less.

4. now you have the approximate value of the business, and how that may change in the near to mid term future. You also have the value of the designer's work or contribution, as it is proposed. Now, since you won't (can't) be paying him/her cash, agree on what percentage ownership of your business is a fair replacement of the cash he/she should have been paid. Keep in mind that the right number is the cash equivalent plus some alpha - some amount to compensate the designer for getting paid later (hopefully) AND for taking the risk inherent in any business (of failure, and therefore not being paid at all). Write this down.

5. Write everything down related to 1-4 above on a single document. Now add some boilerplate legalese - here's how:
(a) if you are not incorporated (or registered as a limited company), then look up some partnership agreements FROM YOUR JURISDICTION (i.e., your country, or State if you're in the U.S., or Province if you're in Canada),
(b) if you are incorporated, or the equivalent, look up share/stock option agreements and/or share/stock option plan documents - again, FROM YOUR JURISDICTION.

6. Add the appropriate boilerplate legalese from the documents you find per 5, above. For example, you will want a clause that describes what jurisdiction's law applies to your agreement, a clause that lists what venue you (two) are restricted to if bringing a lawsuit because of a disagreement, a clause about your document being the full and final expression of your agreement, a clause about the agreement being void if certain acts of God occur, a clause about each of you paying your own taxes, a clause about whether and how alternative dispute resolution will work, etc., etc.

7. print two copies of the document you two have now come up with, and both of you can sign both copies. Each of you take one, and voila - you now have the ideal structure for a contract that allows you to bring on a co-founder, without having to pay them cash right away.

Best of luck!


Congratulations, you are now in the great game of business!

If you are offering him 10% for $70,000, you are putting a $700,000 value on your company. Does that sound reasonable to you?

Its good that you are thinking of offering an 'vc' level return (20X return is on the lower end of what a good venture capital firm might look for, although not the bottom of the range), but keep in mind that VC's also vet their potential investments very carefully (imagine if you were competing with 50-200 other founders also pitching something similar to your potential investor: could you see yourself being the 2 or 3 that are chosen for investment?), AND THEN after that competitive selection process, most of the companies will fail.

If your investor is savvy, he'll know this and appreciate your 20X return offer. However, offering him more - i.e., 1% of the company AFTER he has already gotten 20X return - is a lot, and you are really starting off the negotiations with offering him too much.

Remember, asking for investment is the same thing as selling your company. You are asking your potential investor to 'buy' your company at $700,000, except you don't want him to buy the whole thing, only 10%. You are selling, and your offer is only the start of a negotiation process - keep that in mind.

A promissory note is great - it changes the investment from a traditional investment into a mere loan. This is also called non-dilutive financing: great if what you are building is going to need more investors in the future and/or will be successful. If you've already poured 2 years of your life into this, then that is a good indication that you are ahead of many other wannabe startup founders: a very, very high percentage cannot go 2 years on a single startup.

I suggest offering him a promissory note with a reasonable interest rate - say prime + 3 or 4 percent - and give him an option to convert to shares at a mutually agreed price within 2 years. Ideally you set up a 'mercy' period of, say 6 months, where you pay nothing back. Then you set up small, but increasing monthly payments so that you are paying him back, and set the payback period over maybe 2 or 3 years depending on how long you need to become cash-flow positive in your business. Then, during the time of payback with your monthly payments, give him an option to convert the outstanding balance of his loan to you into equity, and work out a way to calculate the valuation so that he/she gets a discount from what would be then-market value for the shares. Maybe offering a 20% discount would be a good starting point?

Good luck!


It would depend on what I think the sales revenue will be. If I think the monthly overall sales revenue will be $20,000 or more, then I would negotiate between 5-10% of sales. If I think it is going to be less than $20,000 per month, then I would negotiate between 10%-50%, depending on how much less. Obviously, I would want a higher percentage, the lower the expected sales. The bare minimum for me to consider selling the product at all would be $4,000 in monthly sales revenue - if I think it will have less than $4,000 in monthly sales, I would want a reasonable percentage (maybe 10-15%) but also charge cash sales fees between $2,000 to $5,000 depending on how much work is involved in doing the competitive product research, keyword and listing research, and whether I will have access to recommending product changes based on negative reviews, or bundling options based on reviews, questions answered, and Amazon's suggested 'also bought.'


The answer: very carefully at first, but wholeheartedly if you commit.

If a guy with an idea for an app is asking you work with him, AND he already has a team of developers committed to the project, that is a good start. This indicates that the individuals on the dev team are getting more value working on this project than by doing something else.

As a result, you will want to do a few things before you decide to work with this guy and his dev team, or not.

1. Speak to each member of the dev team individually.
If the guy doesn't like or want you to speak to the dev team, that's a red flag and you can walk away in good conscience.
If you get to speak to each member of the dev team, learn how they came to become a part of the project and what they think (a) they are building, (b) why it is worth doing - both monetarily and otherwise, and (c) what they will do after it is built (are they thinking they will stay for the long term with a successful startup, or will they move on to the next project/contract, or do they have no idea? All very telling responses)

2. Negotiate your cash compensation separately from everything else.
Whether you get paid in 1 month, in installments, or after a future event ("we make a profit"), negotiate what the total amount will be first. Then, after that negotiate further to increase that amount based on concessions you are willing to make: you want more if you are paid in 2 years compared to if you are paid in 1 year. IF the guy won't give you a concrete date by which you are paid ("... I don't know when we will be profitable") or tells you a date but is unwilling to commit to it in writing, THEN you will want to require penalties with timelines. I.e., IF NOT profitable (and you are paid) after 1 year, then the amount you are promised increases by 20% + immediate $5,000 cash payment out of the guy's pocket at that time; IF NOT profitable after 2 years, then increase by 50% + immediate $15,000 cash payment out of guy's pocket at that time, etc.

3. After you finish negotiating cash, then negotiate equity and/or partnership.
Since the guy is unlikely to have incorporated at this point, there will be no corporate entity from which you can obtain legal rights to equity in the form of shares/stock or options. However, you need a legally binding document now. In order to prevent any funny tricks (not that they are necessarily being planned now, but they happen all the time when things change and the unexpected comes up - the guy has a baby, moves out of the country, comes into some money, etc., etc.) you need a legally binding written agreement now. Unless and until a corporation or LLC is filed/registered, you will want a partnership agreement that has the guy give you XX% of the app and anything related to the app (spin-off's, the code, etc.) now. If the guy is not willing to sign a legal agreement now, then you can again walk away in good conscience

4. If you get all of the above figured out and you know you can afford to work on this project full-time for the next 2-3 years without requiring any income at all, then and only then should you commit. However, once you commit, commit for hard. Commit for real. Make it happen, and don't look back.

Best of luck!


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