Fund raising question

I have been invited to invest in a start-up company. The company is trying to raise $5,000,000. Investors are basically going to be awarded 20% of the company stock and receive 20% of the profits as dividends. The woman behind it inspires confidence is well-connected and I think is onto a good idea, although the product is way out of my area of interest.

My question is for a what should be a low-risk venture is this 20% compensation structure normal? 20% sounds low to me but I don't have much to compare it to.

Quote: Wizard

the product is way out of my area of interest. .

My experience has been to stay away
from one, people you don't know extremely
well, and two, products you have
no experience with and have no interest
in. I've known people who invest like this
and they only make money about 10%
of the time. Whatever money you have
right now, hang onto it. In fact, many experts
are saying get it and stick it under the mattress.
This is a very bad time to invest, something
is coming and it's not good.

Strange as it may seem, I agree with Bob.

If you want a crash course in this sort of thing, watch a few episodes of Shark Tank.

Quote: Wizard

I have been invited to invest in a start-up company. The company is trying to raise $5,000,000. Investors are basically going to be awarded 20% of the company stock and receive 20% of the profits as dividends. The woman behind it inspires confidence is well-connected and I think is onto a good idea, although the product is way out of my area of interest.

My question is for a what should be a low-risk venture is this 20% compensation structure normal? 20% sounds low to me but I don't have much to compare it to.

Depends on their current stage. Do they have a current revenue stream? Are they showing growth? They are rating their company at 25 million. They better have between 2 and 10 million in revenue to get that sort of valuation (dependent on margins). They out to have strong fundamentals on the balance sheet already and not just a pipe dream. They should have a clear exit strategy for investors (what about further investment and funding, where will that leave you with any share dilutions). What's their business plan if things don't work? Do they have key metrics to hit? Will they quit and give you back something if it turns out the idea is not feasible?

If they just have an idea and no income, 20% of nothing is worth nothing and you'd really want to know where that 5 million is going... the company is worth nothing right now, and you'd want a far higher slice of the pie for the risk you are taking.

I wish I could find the very simple business value calculator I found once... but unexecuted ideas are worth : multiplier for industry x business innovation x factor of market size x $0.

Quote: TheCesspit

I wish I could find the very simple business value calculator I found once... but unexecuted ideas are worth :

Are worth zero, usually. I knew a guy
15 years ago who's parents finally
died and left him half a mil. He went
crazy investing in this and that and
lost all of it. It's the downfall of lots
of lottery winners too. Giving your
money to someone so they can do
all the work and you make money is
usually, not always, but usually, a bad
idea.

It bankrupted Mark Twain. The investors
sucked him dry and kept coming back
for more.

Thanks for the comments thus far. Do any of you know when someone takes a business idea to venture capitalists, and they like it, what is the usual compensation arrangement to the venture capitalists?

Quote: Wizard

Thanks for the comments thus far. Do any of you know when someone takes a business idea to venture capitalists, and they like it, what is the usual compensation arrangement to the venture capitalists?

Ideas are worth nothing. VCs don't care for ideas. VCs are not in the business of making ideas a reality.

They need a business in progress, set up and showing some signs of life, even if that life is pretty small and weak. Angel investors, who are really early stage folks, might front some money for the initial development and set up, prove the concept and show some sort of use of the product (even if no cash flow in). VCs might then be interested. The usual deals depend a lot of factors... there's a lot of material online about it, and how the value the company, and what sort of percentage of that they need.

VCs will take a lot of the business share in A-round funding. 50-90% seems common... the idea being that that 50% equity of a company with no real assets now for could be worth a lot when they get the big growth they want. Many owners don't want to cough up 50%... but 100% of very little is much less than 50% of a big pile of income.

Later rounds of investment tend to be smaller lumps of the company sold off, for more money... that may pay out early investors, or dilute their holdings. The 50% may become 30%. But if the valuation has rocketed from 1 million to 10 million, that's still good for them, as new money comes in for much less cost to them, which can help their A-round of funding get even better gains.

Or it might all go tits up, as can happen and all the investors lose out. Which is why VCs want 10-100 times growth on their capital. To make up for all the other businesses that fail.

Take what I say with a few grains of salt. I've sat on the outskirts of this type of thing, not directly involved in funding rounds, but been affected by them a fair amount.

I take it you do no "daily" investing in stocks. Maybe you should look into it.

It is the same thing, really, Investing in companies. Just more of them.

Not talking about day traders. More traditional. Researching value, buying and selling. Setting price points.

You can be as busy as you want to be. Plenty of nerdy time consuming calculating opportunities.

It is certainly no more risky than what you're thinking of doing. Much less, I'd say. Unless you manage to f*** up really badly.

Quote: rxwine

It is certainly no more risky than what you're thinking of doing. Much less, I'd say.

Far better thing to do with your money. You can
spread it among so many things. Investing in a
new product is what you do when you have so
much money it's meaningless when you lose it.
I don't think that's the Wiz's position. I've been
recalling, and I remember lots and lots of people
who lost money and only a couple who made it.
What should that tell you.