Start-up business offer

[catlanta33]

Spent a lot of time researching on possibly starting an e-commerce site with two other guys. For the sake of the discussion, market research indicates 3 other majors sites that we can determine are roughly 2.5, 10 and 30 million in annual gross sales.

The two gentlemen I'm talking to are currently customers, one being a long time friend.

They're offering me basically a min wage salary with market rate adjustments at 18 months, 36 months and annually thereafter along with the following:

-5% equity of 10 mil shares off the bat
-500K more in stock options after yr1 with 50% vested in 12 months and remaining vested monthly to maturity over 12 months
-1.5 more in options yr3 with 50% vested in 12 months and remaining vested monthly to maturity over 36 months

So total equity at 24 months is 10% and 7 years is 25%.

Admittedly, I'm a simpleton on most of this. What I've found is they're basically treating me as first employee and not founder. I'm not making any financial investments except for practically working for free for 18 months and they are funding the start-up from profit off another business. So they do have something to fall back on if this fails where I don't. Also, both will be involved daily for 3-4 months then I run it.

Everyone agrees we will not make a dime for at least 18 months.

What say you? And willie, assume we're selling fake vaginas and black dildos cast from Lexington Steele if it gets you involved.

 

[Bill@ModernThirst]

Are you getting options or shares outright? Just for the sake of discussion, if you get options, you'll want to have the cash on hand to exercise them. Otherwise, you'll get a nice payday, but you won't have some or all of that 10-25% equity.

 

[anon_aawvduncd4ay0]

Can you afford to not make squat for 18 months or even 24 months if things go really slow? Do you have faith in these guys?

 

[Dennis Reynolds]

How much $ are they putting in? How are they pricing these options? What are they valuing the business at? You won't own 25% of the company, you'd own 10%, plus the options to buy 15% more, but you'd still have to come up with the cash to buy it. Options =/= actual ownership.

Also, what happens to your salary after 18 months? Cause your stock and options are entirely illiquid. You can't actually sell those to anyone, except your bosses. So on paper you'd have X, but no actual cash flow.

If it is profitable after 18 months, do you get a % of the profits?

I would be very wary about this being an offshoot of an existing business. They can allocate costs between the two however they want, depressing profitability in your business.

You'd have to really, really trust these guys, both of them. They can screw you about 18 different ways. Of the 90% you don't own, is it split 50/50 between the two? At leas then you could be a tie breaker if they disagree about something.

I talk to lots of small ecommerce companies, the guys who sell stuff on amazon, ebay and their own websites. It's a freaking grind. Tough, very competitive biz.

 

[joeyrupption]

I refuse to work with Barbara or Lori.

So, I'm sorry to say: "I'm OUT."

Good luck.

 

[awf]

Can you afford to not make squat for 18 months or even 24 months if things go really slow? Do you have faith in these guys?

He can always work a second job.....It would be tough, but it would also be worth it in the long run. I worked two full time jobs for about 16 months. You know the old saying...."you do what you have to do".

 

[UKserialkiller]

What say you? And willie, assume we're selling pre-fabricated vaginas and solar powered black dildos cast from Lexington Steele if it gets you involved.

FTFY


18 months not making a dime? That's a long time Catlanta. If you have money in reserves that you can gamble for 1.5 years they by all means do it. But If that business has problems, won't that make those shares worthless?

Plus what kind of strain will that do to your family? Seems like a good deal if it pans out.

 

[catlanta33]

Try to give more info but Dennis is more or less hitting on my fears that my wife has been.

They are valuing the business at 3 mil. Which is 100% arbitrary and pulling a number out of our ***.

Their cut, don't know. I think because they own the other company 50/50, they don't know how to answer this question to me just yet.

Yes I can live off basically nothing for 18 months to 2 years. Helps my wife has a good paying, solid job.

Our market wouldn't be going after Home Depot, Lowes, Amazon or retail anyone for that matter. We would be competing for commercial business like the 3 companies we researched. Don't get me wrong, this isn't going to be a cake walk and one of the guys is much more optimistic than me and the other.

They're both really great guys and I trust them but to be honest, I don't trust anyone on Earth enough to quit a great-paying job and make jack dick for 18 months based on their word.

 

[d2atTech]

few things to keep in mind. assuming it's not your idea, 10% equity is a fantastic deal, but keep in mind that is pre-money. this will dilute down as you raise financing. if you scale your business (and i'm assuming you will) this number will reduce.

1) assuming this company was not your idea, a 10% equity (esp. over 2 years vesting) is a out of the park home run. As a point of reference, I recruited and hired one public company ceo and one public company svp to two separate startups of mine (one was from Austin, Tx!). I offered 6% post-money (12% pre) over a four year vesting schedule. you are getting a better deal.

2) you generally don't ever make a dime out of startups. you write your $250 lottery ticket and hope for the best. With that said, you generally always do make a salary. You need to take that into account. With the ceo's I hired in the reference above, I hired at $200k base + 50% annual bonus if all goals are met, contingent on a series A financing of at least $5M. This meant they didn't get a salary until we raised money, but also incented them to help raise financing. You should expect a fair, equitable deal. Minimum wage isn't fair. If you need help determining the financials, send me an email. I've paid for a fair bit of executive compensation research that I'd be happy to send your way--no need for you end up paying the same.

I would be exceptionally wary of taking a min. wage salary. This means that your colleagues (a) don't have the money and are unable to raise any in the foreseeable future or (b) aren't being forthright with you on how much they are able to compensate.

3) shares are not options. if you are essentially taking all the risk for the company (seems to me like you are), i would insist on getting shares. shares can still vest, but you end up paying less taxes. make sure you file 83B elections and make sure to get a 409 valuation document in traceable (e.g. email) fashion.

good luck!

 

[Dennis Reynolds]

The only way the company is worth $3m is if those two are putting in $2.7m, with you putting in $300k in sweat equity. If they are only funding like $1m, then it's a $1m company, you should get a larger share.

I assume they are not planning on raising outside equity right? If not you wouldn't get diluted down, if they are, then d2 is right.

I agree with D2 on the minimum wage thing. They should be able to pay you a livable wage if you are running the business.

What's the exit strategy?

 

[BankerCat12]

One thing that caught me....if one guy is more optimistic than you and the other guy, what is your reason for not being more optimistic than everyone? You are the one that is going to be working for free for the next two years. If it fails, you have nothing to show for it while they move along to their other businesses and/or next new business.

I would think you would need to be the most optimistic of everyone involved. You are going to be running the show after the first few months. Just my two cents.

 

[UKserialkiller]

Can't you ask for some pay for the 18 months and decrease your share size or to leverage down on future earnings.

I mean if these guys can afford to do this, or throw the money up, what's the harm in them paying you?

 

[catlanta33]

They haven't really posed hard figures but website development will be 25K and inventory will be 25K. Basically, aside from our sweat equity, mine much more so, this would take 50K to get going.

They are getting a loan through BofA for 100K. They don't need it but they are seeking it to make sure there's enough to get this going just in case something were to happen with the other business.

I did get another option which is higher salary and 3% equity. I'm willing to take some risk on this but not all the risk. If I'm doing the hard work, I'm going to be working the long hours and I'm going to be the glue of everything then I want to see that I can make a fortune and be bought out in 10 years.

To banker, I'm pessimistic in nature. If I make this jump and leave my current job I'm going in 100%. I'm actually not as concerned that we can make money as I am getting f'd upfront and not being able to do anything after 2 years of hell.

 

[catlanta33]

Can't you ask for some pay for the 18 months and decrease your share size or to leverage down on future earnings.

I mean if these guys can afford to do this, or throw the money up, what's the harm in them paying you?

They did and the best salary offer was with 0% equity up front and 5% basically at year 7.

 

[d2atTech]

They haven't really posed hard figures but website development will be 25K and inventory will be 25K. Basically, aside from our sweat equity, mine much more so, this would take 50K to get going.

They are getting a loan through BofA for 100K. They don't need it but they are seeking it to make sure there's enough to get this going just in case something were to happen with the other business.

I did get another option which is higher salary and 3% equity. I'm willing to take some risk on this but not all the risk. If I'm doing the hard work, I'm going to be working the long hours and I'm going to be the glue of everything then I want to see that I can make a fortune and be bought out in 10 years.

To banker, I'm pessimistic in nature. If I make this jump and leave my current job I'm going in 100%. I'm actually not as concerned that we can make money as I am getting f'd upfront and not being able to do anything after 2 years of hell.

just a thought as you negotiate things. if they don't have the ability to execute and it doesn't seem like they have an ip around the idea, why don't you just strike out on your own? if you are wondering the same thing as well, you need to go back to them and ask for 1/3 of the venture minimum.

 

[catlanta33]

just a thought as you negotiate things. if they don't have the ability to executive and it doesn't seem like they have an ip around the idea, why don't you just strike out on your own? if you are wondering the same thing as well, you need to go back to them and ask for 1/3 of the venture minimum.

That's where I'm headed with this. In addition to ponying up the website and inventory costs, they have a small shop where we would carry the inventory and ship the orders from. All and all, I can't see their intitial investment being more than 50-60K. They are already open direct with one vendor (the one I represent for them now) and we would have to undercut current websites by a point or 2 in order to get traction with the other major vendors.

For me, I don't have the stomach to do this by myself. But, I am looking for a way to present this to them that one, my sweat equity is worth X and if I'm going to be the main player in this outside of money, I need X to proceed.

 

[Bill Cosby]

 

[d2atTech]

That's where I'm headed with this. In addition to ponying up the website and inventory costs, they have a small shop where we would carry the inventory and ship the orders from. All and all, I can't see their intitial investment being more than 50-60K. They are already open direct with one vendor (the one I represent for them now) and we would have to undercut current websites by a point or 2 in order to get traction with the other major vendors.

For me, I don't have the stomach to do this by myself. But, I am looking for a way to present this to them that one, my sweat equity is worth X and if I'm going to be the main player in this outside of money, I need X to proceed.

dude, if you need a bet hedge for show, i'd be happy to say that i'd be willing to help and finance you.

 

[krazykats]

You mentioned Home Depot or lowes etc as an example of "not what your doing" and said commercial customers. So I'm assuming your offering a chance to buy direct?

Being nosy here because I have a commercial client that is pretty damn big, what kind of products?

 

[Dennis Reynolds]

They are putting $50-60k in cash only, but "valuing" the business at $3m? Mmmkay. That's ridiculous. I'd be out. The main thing is that even when that 18 months or whatever is over - it's not like you suddenly start getting paid more. You don't (unless I missed that your salary increases). You start getting options that you can't exercise. The only payday comes when you all sell the business, and that may not ever happen. Meanwhile, they control the company, and can suck funds out of it if they wish, and you can't stop them.
I guess I don't understand how you ever get paid (in cash) absent a sale of the business for some big amount.

 

[catlanta33]

dude, if you need a bet hedge for show, i'd be happy to say that i'd be willing to help and finance you.

Awesome. I've already asked from more information so depending on what they come back with, it may be dead in the water or we keep flirting.

Krazy, I sell electronic locks for commercial, multi-housing and I represent a line that is hard wire access control like prox and smart card readers.

If we did this site, we would basically be slowly taking away business from the brick and mortar wholesale distributor, like my old company. So we would target any commercial business that we can from universities, multi-family properties, small/large commercial. Anyone is a customer if they're looking to buy quantity of electronic hardware in what we offer.

 

[d2atTech]

Awesome. I've already asked from more information so depending on what they come back with, it may be dead in the water or we keep flirting.

Krazy, I sell electronic locks for commercial, multi-housing and I represent a line that is hard wire access control like prox and smart card readers.

If we did this site, we would basically be slowly taking away business from the brick and mortar wholesale distributor, like my old company. So we would target any commercial business that we can from universities, multi-family properties, small/large commercial. Anyone is a customer if they're looking to buy quantity of electronic hardware in what we offer.

dude if you need to raise 60k to do this by yourself, i'd be happy to make the right intro's for you. why not apply to y-combinator?

 

[catlanta33]

They are putting $50-60k in cash only, but "valuing" the business at $3m? Mmmkay. That's ridiculous. I'd be out. The main thing is that even when that 18 months or whatever is over - it's not like you suddenly start getting paid more. You don't (unless I missed that your salary increases). You start getting options that you can't exercise. The only payday comes when you all sell the business, and that may not ever happen. Meanwhile, they control the company, and can suck funds out of it if they wish, and you can't stop them.
I guess I don't understand how you ever get paid (in cash) absent a sale of the business for some big amount.

I'm not expert but I've seen enough episodes of Shark Tank to know what a company is worth is a person's head isn't the same thing as what a VC would value it at.

More or less, unless I can see upfront, in writing with projections of what I make or stand to make year after year, I'm not going forward. The salary would increase at 18, 36 months then annually according to market rate.

 

[catlanta33]

dude if you need to raise 60k to do this by yourself, i'd be happy to make the right intro's for you. why not apply to y-combinator?

To be honest, I'm a big ***** when it comes to this kind of risk. I'm not even 6 months at my current gig and have made more money than I ever have, wife and I just bought a house so now I have more debt than I ever have. And Dennis asked exit strategy, probably sell in 10 years. So if I can see retiring before I turn 46, I'm willing to take that leap but all on my own is just too much to stomach.

I really want to make this work with these guys because we're all the same age; all 3 of us have extensive distribution experience, 2 of us are product experts and the other (super optimistic one) is a great salesman. Their other business is basically 2 years old and they've already hit 1.2 million at year two and are projected 70% of goal right now for year 3. I really wanted to get in on that action, which is what prompted me to reach out but they want to pursue e-commerce as an entire new venture and I wouldn't have anything to do with the other business.

 

[d2atTech]

I'm not expert but I've seen enough episodes of Shark Tank to know what a company is worth is a person's head isn't the same thing as what a VC would value it at.

More or less, unless I can see upfront, in writing with projections of what I make or stand to make year after year, I'm not going forward. The salary would increase at 18, 36 months then annually according to market rate.

don't believe in what you see on shark tank, it's all bs. none of those folks outside of mark cuban actually know how to function as a vc, let alone a successful one. actual valuations after diligence are pretty much a bet on the founding team with limited metrics on the vc end. how much you get valued/diluted is also of function of how many offers you can conjure up.

this goes for projections as well. it's standard practice to write up five year financials. rarely have my companies followed that plan. my strong advice to you is to NEVER tie your financials to the company's financials. this contingent salary 18 or 36 mo out is not fair to you.

 

[d2atTech]

To be honest, I'm a big ***** when it comes to this kind of risk. I'm not even 6 months at my current gig and have made more money than I ever have, wife and I just bought a house so now I have more debt than I ever have. And Dennis asked exit strategy, probably sell in 10 years. So if I can see retiring before I turn 46, I'm willing to take that leap but all on my own is just too much to stomach.

I really want to make this work with these guys because we're all the same age; all 3 of us have extensive distribution experience, 2 of us are product experts and the other (super optimistic one) is a great salesman. Their other business is basically 2 years old and they've already hit 1.2 million at year two and are projected 70% of goal right now for year 3. I really wanted to get in on that action, which is what prompted me to reach out but they want to pursue e-commerce as an entire new venture and I wouldn't have anything to do with the other business.

you actually bring up a couple good points. you have to keep your family situation in mind. given what you have told me, i'd advise you not to move forward. tell them you'd be happy to work full time once things are well funded and happy to consult or help here and there till then. also, given what you have told me, you need to ask for more than 50%. your other friends are contributing and are most certainly hedging their bets with their other venture. believe me, deadweight sucks--i've made the same mistake in the past.

 

[krazykats]

Well, sounds like your getting great advice.

Not sure a restaurant could benefit from the product yet but if you get things going I could get you talking to some folks that could bring you some business possibly.

 

[catlanta33]

I am getting great advice. I knew there were some smart mofos on here with this stuff.

Thanks, Krazy. Restaurants usually need panic hardware and exit alarms like the ones that say "this alarm will sound for 15 seconds" on the back door. Part of my vision is to build in a dealer network of installers that we vet as legitimate (lots of them are not) and they would buy the product from us and agree to some general installation pricing.

Like I said, the idea is there. It's not as simple as just showing up and you're playing but for e-commerce businesses that I've been looking at, it's certainly doesn't seem like one of the more difficult ones to break into. I'm just not willing to do this knowing I would be answering the calls, doing over-the-phone tech support, reordering inventory, dealing with RMAs, shipping all the orders and all the other stuff that comes with distribution for what they're offering.

D2's last post seems like where this is headed. You guys make this investment, you guys get it off the ground and when you need someone like me, that has specialized experience in what you're selling, relationships with dealers, knows how a vendor operates with a distributor, worked for a brick and mortar distributor with this product and whatever useless knowledge I've compiled the last 9 years, make me an offer and lets talk.

 

[BBdK]

Well, sounds like your getting great advice.

.

 

[krazykats]

Sounds like they are trying to avoid that and take advantage of knowledge and relationships with deferred compensation really.

Good luck.

 

[catlanta33]

How in TF do you send someone a Direct Message?

Or, @d2atTech, send me one so I can get your email.

 

[d2atTech]

How in TF do you send someone a Direct Message?

Or, @d2atTech, send me one so I can get your email.

i couldn't figure out how to send a direct message either. just send me an email: arajagop [at] caltech [dot] edu

 

[Get Buckets]

i couldn't figure out how to send a direct message either. just send me an email: arajagop [at] caltech [dot] edu

How did you come to be posting on a UK message board?

 

[anthonys735]

Even if you trust those dudes there are countless examples of small businesses changing that quickly. You'd want an air tight buy-sell and I'd want a specific schedule for these milestones. Completely different setup but in our expansion efforts we're paying the manager market value or a little higher with options after break even. You need an attorney with experience to examine the contracts, for sure.

While I don't like the terms they have for you and the numbers, as pointed out sound fishy, it's probably worth throwing something crazy out there and seeing if they're serious.. You have some good things going for you. Young, I don't think you have kids, solid 2nd income, several years specialized experience in your fall back career. So you're not totally exposed and it would be a decent time for a leap of faith. Not sure I'd do anything at minimum wage though.

Have they presented you with a business plan? Forecasted financials?

 

[d2atTech]

How did you come to be posting on a UK message board?

born in lexington, mom was a undergrad there (born the summer before her senior year). lived there till i was five. got into the uk alumni group in socal because of my mom.

 

[catlanta33]

i couldn't figure out how to send a direct message either. just send me an email: arajagop [at] caltech [dot] edu

Sent.

 

[Get Buckets]

born in lexington, mom was a undergrad there (born the summer before her senior year). lived there till i was five. got into the uk alumni group in socal because of my mom.

Nice.

 

[catlanta33]

Even if you trust those dudes there are countless examples of small businesses changing that quickly. You'd want an air tight buy-sell and I'd want a specific schedule for these milestones. Completely different setup but in our expansion efforts we're paying the manager market value or a little higher with options after break even. You need an attorney with experience to examine the contracts, for sure.

While I don't like the terms they have for you and the numbers, as pointed out sound fishy, it's probably worth throwing something crazy out there and seeing if they're serious.. You have some good things going for you. Young, I don't think you have kids, solid 2nd income, several years specialized experience in your fall back career. So you're not totally exposed and it would be a decent time for a leap of faith. Not sure I'd do anything at minimum wage though.

Have they presented you with a business plan? Forecasted financials?

With how this has gone today, which I have to point out is probably the most serious and well-informed thread on the Paddock in as long as I can remember, I'm going to see what they have to say about some questions I asked over the weekend.

Seriously great info from everyone. Thank you. I've been losing sleep every night trying to approach this with clear eyes and a full heart.

 

[awf]

FTFY


18 months not making a dime? That's a long time Catlanta. If you have money in reserves that you can gamble for 1.5 years they by all means do it. But If that business has problems, won't that make those shares worthless?

Plus what kind of strain will that do to your family? Seems like a good deal if it pans out.

I read that most start ups take 5 years to start really making money.

 

[d2atTech]

I read that most start ups take 5 years to start really making money.

to be honest most successful start ups don't even make it to revenue. better to exit pre-sales if you can.