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How much to offer

Postby 5rocks » Tue Jan 16, 2007 8:30 am

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Hello. I am looking for some advice as to what to offer an investor for their money. We actually have several people interested in investing in our product although percentages have not been discussed. Now that we have manufacturing set up with a low cost per unit, it is time to get down to business with potential investors. I understand most investors want a stake in the product rather than just a percentage on their money. I don't blame them. Thoughts?

Pat Rock

Postby Michelle » Fri Jan 19, 2007 9:14 am

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Hi Pat:

It really depends on what you have, what they are offering and so many factors so it's hard to respond to a post like this.

A great place to start understanding the concepts is http://money.howstuffworks.com/startup-capital.htm

You need a basic understanding of the framework of financing.

Venture capitalists put in lots of money, so you probably are not talking about that right now.
Angel investors are a tranche of inventors that put in typically from $50,000 to $200,000 in an invention, although it varies up to about $5 million. They are hard to find and typically focused in their area of experience in certain industries.
If you need less than that, that you are probably looking for a seed investor for $10,000 to $200,000.
Before that, would be getting money from folks you know, typically 3-F money from "family, friends and fools".
Below that, is your own personal bootstrapping.

Overall, the question of how to share depends on so many factors.

This question is very complex as there are dozens of ways to compensate investors in your project. You can offer such things as profit sharing, interest, equity, shares, bonuses, etc.

Although there is no established right ght way, it is typically recommended to inventors not to borrow, lend, or pay interest on investor capital or to give equity in a company, but instead to offer them a percentage of the future royalties associated with the successful commercialization of your project. One thing I would urge is for any inventor to keep your equity as much as possible and not give it away too soon. You need to be ready to invest your own time and money into an invention idea.

One of biggest mistakes is giving away equity in your company too fast and too soon. There can be huge dilution by additional people who need to come into your business, so offer %s of profits, not % of company.

A rule of thumb that some use is to pay the investor is one percent of the inventors share of royalties for each one thousand dollars invested, assuming it would take $100,000 to get the product to market.

Hope this helps. If anyone agrees or disagrees, please share your thoughts

Last edited by Michelle on Fri Jan 19, 2007 9:43 am, edited 4 times in total.

Postby Michelle » Fri Jan 19, 2007 9:22 am

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I had this article in our helpful resources section of our website. The article is a bit outdated, but lists an extensive list of angel investor networks. The information is helpful in getting an idea of what angel investors are willing to invest.