I've invented. How much should business partner have?

[Sailingsaves]

It is a boaty product and I know a lot of the sailors on here are business people and some are inventors, hence Scuttlebut.

I have an invention. Patent pending, not granted yet, so can't divulge yet, not necessary for this advice anyway.

I needed a business brain and someone has stepped forward. He runs his own business.

He thinks the product is brilliant and will earn a lot. Many people have thought product brilliant but I chose this chap for his integrity and my gut feeling. The money does not bother me - I just need enough to get by. He expects a few million (net) out of it easily.

BUT...
At first meeting, he said we should set up a Ltd company, my wife and I as directors, and he would take say 50% of the money.
He said we would sell shares to investors (that is how we would get investment as well as through SMART awards etc)

Today, he has suggested that he and I are directors and we go 50:50

But he is very busy with his own company, nothing is moving as fast as it should, what if we did not agree about a part of the development of the product? What ratio do I need to be executive decision maker? 51%? or more.

What if he was run over by a bus at some time? Let us assume it went to his wife? Or does one write a contract to foresee such things?

I am happy for him to have 50% of money but do not want to lose control of product, but I realise also that he will have more business sense than I have.

I have done a lot to create this product and I will still have to work very hard to launch it. He will give business advice and be the spokesperson as I am an eccentric twit and can only create things.

Any advice welcome as this is new to me.

Thank you

 

[Bru]

Retain the patent and all rights in your own name

Set up a limited company with the busiiness partner and licence the product to the company

That's not the be all and end all of it, but a starting point anyway

 

[dom]

A bit of a how long is a piece of sting question really. The percentage you sign over to him will primarily depend on: how much money he is putting into the project, his relevant business expertise, his track record in the area and how much time he proposes to spend on the project.

Regarding the matter of control, yes it’s easy to structure a Limited Company in the way you suggest, but the more complex your requirements the more it will cost you. As Erbas says, you might also want to consider splitting out the patent ownership in some way.

A word of caution: venture capital funds are currently inundated with requests for seed capital and finding a wealthy angel investor predisposed towards your idea will be hit and miss, unless that is your friend is in a position and willing to provide early capital.

If he’s not, you’ll need to think carefully about a business partner who does not bring a good chunk of funds to the table; I’m not saying it’s a show stopper, but you’ll need to consider why. Firstly, VC/Angel investors generally prefer to negotiate directly with the entrepreneur, as opposed to a so called "business person". Secondly, VC/Angel investors are often the best people to provide business advice, production know-how, a roof over your head, sales and admin support, etc.

But all this comes at price! So if you truly have a good idea, it would be a shame to find yourself with a 50% business partner who didn't contribute that much, and were then diluted down to 25% when you were both forced to hand a further 50% over to the VC firm/Angel investor.

Good luck!

 

[Sailingsaves]

Retain the patent and all rights in your own name

Set up a limited company with the busiiness partner and licence the product to the company

That's not the be all and end all of it, but a starting point anyway

Yes, that is excellent advice thank you.

 

[Sailingsaves]

Thank you.

His plan was to gain a SMART award for proof of concept and market research and then approach an angel ... until I read what you just mentioned.

I preferred his first idea where shares were sold.

If we did go the worst way that you have indicated, I would be happy with 25%. But I will do as previous poster stated and ensure patent is retained by me.

No, he is only bringing business know how (and I very very badly need it) and maybe a couple of grand.

I have to go with him in some format because I have no one else and he has taken products to market before and has knowledge and contacts that would take me a career's time (if ever) to learn.

Thank you.

A bit of a how long is a piece of sting question really. The percentage you sign over to him will primarily depend on: how much money he is putting into the project, his relevant business expertise, his track record in the area and how much time he proposes to spend on the project.

Regarding the matter of control, yes it’s easy to structure a Limited Company in the way you suggest, but the more complex your requirements the more it will cost you. You might also want to consider splitting the patent ownership out in some way.

A word of caution: venture capital funds are currently inundated with requests for seed capital and finding a wealthy angel investor predisposed towards your idea will be hit and miss, unless that is your friend is in a position and willing to provide early capital.

If he’s not, you’ll need to think carefully about a business partner who does not bring a good chunk of funds to the table; I’m not saying it’s a show stopper, but you’ll need to consider why. Firstly, VC/Angel investors generally prefer to negotiate directly with the entrepreneur, as opposed to a so called "business person". Secondly, VC/Angel investors are often the best people to provide business advice, production know-how, a roof over your head, sales and admin support, etc.

But all this comes at price! So if you truly have a good idea, it would be a shame if you found yourself initially with a 50% business partner who didn't contribute that much, and were then diluted down to 25% when you were both forced to hand a further 50% over to the VC firm/Angel investor.

Good luck!

 

[bedouin]

One problem with that sort of percentage is that even if you retain control now, if you want to issue more shares to raise further equity later (as you may well do) then your shareholding will get diluted and you will lose control.

If you really want to you can play games with 'A' and 'B' shares where B shares don't have voting rights - but I am not sure how you do that legitimately

 

[VicMallows]

No, he is only bringing business know how (and I very very badly need it) and maybe a couple of grand.

Doesn't that statement worry you just a little bit?

 

[mjcoon]

Retain the patent and all rights in your own name

Presumably he (and anyone else to whom the technology has been divulged) has signed a non-disclosure agreement. I believe this is necessary since, as you say, there must be no "publication" before grant of patent. Was a patent lawyer involved too?

Mike.

 

[longjohnsilver]

One problem with that sort of percentage is that even if you retain control now, if you want to issue more shares to raise further equity later (as you may well do) then your shareholding will get diluted and you will lose control.

If you really want to you can play games with 'A' and 'B' shares where B shares don't have voting rights - but I am not sure how you do that legitimately

Yes, that's what I would do, but I'd want 51% of the A shares to guarantee control. Anything less than that means you are effectively in other peoples hands.

 

[oldbilbo]

Best wishes.

I can't contribute much more than that, but do let me know, when you can, about the product. If it's as useful as you suggest, I'll have one - and maybe two.

 

[Sailingsaves]

Yes, NDA firmly in place.

The invention caused a storm at the NEC Gadget Show live and therefore the idea of the product has been disclosed so even if this business partner falls through, I will stump up the money to finish the IP protection process before priority date elapses.

His £2k will be enough for the patent which is more than I have; I am really scrimping at the moment.
He is bringing in valuable knowledge though and I do like the chap.

I currently have an idea making me £zero. 1% of something would be more than I am making now. The product has to get to market.

I just want it to succeed and even if turnover is £10 million and I end up with £500k I will be happy - it will fund the other inventions I have.

I think we may do a kickstarter for £10k or £20k - that will at least pay for IP protection. Then it can be made public and investors will come forward in droves (we think) and we will be better placed to pick and choose and negotiate harder giving less away to investors.

But I would need him and his brain to make decisions that I'd be poor at making.

SO, back to original question... do I simply need 51%:49% of company to have executive power? (And that would only be incase we ever disagreed over anything which I hope would not happen)

 

[Sailingsaves]

Yes, that's what I would do, but I'd want 51% of the A shares to guarantee control. Anything less than that means you are effectively in other peoples hands.

Thanks for that.

I am sure he will go for that if I broach the subject carefully. He is interested because he thinks he will make a lot of money from it (which is fine by me) and I don't think I can do it without him. I am happy to give him 50% of money and then give more away to an angel if it goes that route.

Thanks for all advice, it is helping a lot.

 

[ralphmalph]

I worked in venture capital before retirement. So first off we always wanted control then we could do what we like, even if the founder disagreed (we could move them sideways).

On to valuations and shares. First of a public indication of share split. I do not think Dragons Den is real world but you will notice they offer decent money for stakes that are about 40%. It is never 50%.

So on how much to give this chap you need to come to a valuation of what you have invented. So first off you have the valuation of the amount of work (time) you have put into develop the product/idea. You could just take hours spent times an hourly rate. Then add the valuation for the IPR at the stage of like it is now. Then you have some idea of the value. So if he is offering a couple of grand and you have a valuation of 100K then 50% is a massive over allocation of the company.

What I would suggest you do is view this as his first offer and that is negotiable (they all are), so if I was you I would take the tack of prove your self. He thinks the return is in the mills and he wants this for a couple of grand and him being busy at the same time. So I would put performance clauses in the contact. 2K buys him 5% if the business gets to 2mill then he can have 50% share capital with no extra cash. But if things turn sour and he is not all he is cracked up to be then you can still attract another investor(s) because you still have 95% of the share capital and you are still 100% in control of the business.

Never sell 50% maybe 49.9% but never 50%.

 

[Phoenix of Hamble]

You can get past the issue of his shareholding automatically passing to his wife through something called a pre-emption clause in the articles of association. Basically, any transfer of shares has to be first offered to existing shareholders. Any decent lawyer who understands incorporation should be able to knock an additional article up to add to the 'standard' set used in no more than a few minutes.

 

[Resolution]

I also had direct equity investment experience before taking up sailing properly. My advice is to think carefully about what you judge to be your skills. Invention or setting up a start up business?if it is the latter, get on with it yourself. If it is the former, you can cede control ( shareholdings and directorships) but contract to receive a royalty on sales or a carried interest in profits.

 

[Tempus]

I worked in venture capital before retirement. So first off we always wanted control then we could do what we like, even if the founder disagreed (we could move them sideways).

On to valuations and shares. First of a public indication of share split. I do not think Dragons Den is real world but you will notice they offer decent money for stakes that are about 40%. It is never 50%.

So on how much to give this chap you need to come to a valuation of what you have invented. So first off you have the valuation of the amount of work (time) you have put into develop the product/idea. You could just take hours spent times an hourly rate. Then add the valuation for the IPR at the stage of like it is now. Then you have some idea of the value. So if he is offering a couple of grand and you have a valuation of 100K then 50% is a massive over allocation of the company.

What I would suggest you do is view this as his first offer and that is negotiable (they all are), so if I was you I would take the tack of prove your self. He thinks the return is in the mills and he wants this for a couple of grand and him being busy at the same time. So I would put performance clauses in the contact. 2K buys him 5% if the business gets to 2mill then he can have 50% share capital with no extra cash. But if things turn sour and he is not all he is cracked up to be then you can still attract another investor(s) because you still have 95% of the share capital and you are still 100% in control of the business.

Never sell 50% maybe 49.9% but never 50%.

+1 and not much to add, but your lack of interest in money should be a real worry to yourself. At the end of the day you need to take some interest as its the liquid upon which the business world floats (or sinks). I'd expect someone to put in around £100k up front for a sensible (20% to 40%) stake in a business that will "sell millions" particularly without requiring much work from them. £2k sounds great - where do I sign? :encouragement:

 

[Phoenix of Hamble]

I also had direct equity investment experience before taking up sailing properly. My advice is to think carefully about what you judge to be your skills. Invention or setting up a start up business?if it is the latter, get on with it yourself. If it is the former, you can cede control ( shareholdings and directorships) but contract to receive a royalty on sales or a carried interest in profits.

+1 but I am also always cautious of profit sharing, as it is so easy to manipulate profits to suit. To avoid this, complicated (and expensive) negotiations need to take place to determine how the profit is to be calculated. A royalty scheme is perhaps a little less exciting, and has a potentially less dramatic opportunity for large sums to be earnt, but is safer, and far easier to establish terms against.

FWIW, You hold the upper hand here. If you have the good idea, then its yours to take to various potential partners, and negotiate favourable terms.... and also... DON'T give away a controlling interest if you do decide to incorporate a company. Remember that you can share reward through, for example, sub contracting manufacture on favourable terms to your potential partner, not just through equity sharing.

 

[jdc]

Inventing is a learned skill, just like accountancy(1). Bringing the product to market, including all the extraneous activity like setting up a company, raising millions, registering a web domain (ok, you try finding one that's free, and not a taxi firm in Idaho) and patenting, and fending of Patent Trolls, and inventing along the way various methods of improving yield, and reducing test escapes, and, oh too many to mention, is 99% of the effort. So don't be too conceited about the idea, you have to execute! Typical damages in a patent dispute are 2% of the product cost. My old colleague used to say that inventing was like syphilis: all the fun was in the the catching...

(1) I said this once to the Vice chancellor of one of our prestigious universities: he reacted badly, but it's true.

 

[Tintin]

In my field as an entrepreneur and proven in making good profits I have had 3 occasions where I have come across great inventions and after initial chats with the inventors we have agreed that I will partner with them.

In all three cases I spent a substantial amount of money and time, in one case to the detriment of my existing business, and in each case the inventor had an unrealistic opinion (IMHO) of what their equity stake / profit share should be.

Ok you have an idea, but to make any money from it you need to be prepared to take a risk and jump into bed with someone with business skills and money, and almost certinly you will lose control.

A solution....

1. Go 50:50 with the money man on the patent.

2. Then license the patent to a Ltd company that you both set up, say with 1000 shares, but only issue 10 each. That leaves 980 for other investors.

3. Have the license agreement time limited, say 20 years, with break points / renegotiation points built in at Year 3, 7 and 15 with criteria such as x units sold, or IP completed.

4. Have the licence agreement paying the inventors on the patent (both of you) a unit fee, something along the lines of 2-3% max.

5. Ensure you have a shareholders agreement for the Ltd co with "put and call" clauses so that if either of you go mad or wish to leave you have a clear mechanic on how to deal with it. Agree this now while you are still friends because I can guarantee that if you or he need to invoke either a "put" or a "call" then you are unlikely to be that freindly at that stage, and only the lawyers will win.

6. Be prepared to let him get on with it - do not meddle - inventors are very rarely any good at marketing or sales or atrracting proper finance - accept you have to let your "baby" grow up (this will be hard for you).

7. Get a firm commitment from him for the amount of money he is putting in at this seed stage to the Ltd company.

8. Accept your shareholding will get diluted over time - that is what happens.

You are right, 100% or 51% of nothing is worth nothing - 1% of something is worth having.

In each of my three cases it was stupid stipulations and meddling by an enthusiastic amateur in business that scuppered each deal, on after I had spent close on £1/4m and post launch - he reneged on our agreement and as he had no money it was not worth pursuing for my costs.

One final thought - no-one will ever do it the way youy think it should be done, and the world is littered with great ideas and inventions that never got to market.

Good luck, and stop being so controlling - you are in effect just a glorified sperm donor to your baby (harsh but true).

 

[Tintin]

Another thought - if the product has global appeal you MUST make sure the person you are dealing with has experience of setting up territory licensing / distribution deals - people often think they can crack the US on their own - few manage it.