The man owns a digital company and offered to invest not cash but to assign a dedicated team to my project to build the platform and market it. He estimated the cost to be 119k £ and offered a discount that reduced the cost to 73k £. Then he proposed to personally take charge of 70% of the investment in return for 15% equity, and I would have to take charge of the remaining 30%. He then said he could increase his personal contribution to 75%, in return for +5% equity making it 20%.
I suspected that he inflated the cost (+2200 hours to build a blogging platform with a whole dedicated team ? Really ? I built a good prototype with one freelancer in one week for 400$!) and that my contribution would cover (exceed ?) the costs so that he gains a client + 20% from a promising startup for free.
So let me know your expert opinions. How would you react to such an offer ?
Total conflict of interest. Your fear of inflated hours may not be true, but the opportunity for such a thing to happen is just too great.....and tempting for him.
if the "investor" really believes in your business then he should invest and let you use the money to go out to the market to find developers. I think we both know you'll get them cheaper!
if the investor is really a software house posing as an investor then he probably won't go for it ... in which case move on.
This is a very common trap. Service providers presenting themselves as angels, to lure you in, and then want to take your money. The most common story you are going to hear is 'to help you become investor ready' While I have nothing against advisors helping you get investor ready, I have no trust for those luring you be deception. My recommendation is stay away from them. If you want a consultant, take those who publish themselves as such. If you need investor brokers, pay with commission, not retainer. And if you are after angels, they should give you money, not you give them
If he truly believes in the company then he would just give you money for a 20% stake and you could hire a team of your own liking. Instead it seems like he is trying to make a sale for his own company's benefit. I would stay clear of this offer.
It is common for digital agencies to accept equity for reduced rates on startups/founders they believe could be successful. In addition to the service hours they provide they might provide extra attention to detail to make it success due to equity. If it is a good option for you depends on what are your other options and your skill set. If you hire one or two developers, can you build the platform by yourself using what you would pay the agency? Once its built can you start selling it?
I would not comment about the hours needed to develop a platform without knowing all that is included in it.
However I never heard service providers calling themselves as angel investors.
The "investor" candidate has a bank of hours of labor that he's not fully utilizing. His programmers aren't working at full capacity, and in the time that they aren't working on paying clients' work, they could be diverted to to work on yours at no extra expense, since he's already paying their salary, and would otherwise be carrying this excess inventory of working hours. So no, this person is shifting the risk entirely to you. He gets paid either way, and you get no assurance that his staff will give your project any more priority than another client.
If he wants to invest, then he can donate the excess inventory of hours from his staff to your company in exchange for some amount of equity. But that amount should be at a pre-agree-upon rate and be related to the number of hours actually contributed. As well, there need to be included benchmarks to keep their team on schedule, otherwise the hours donated don't count towards equity. There also needs to be a clear assignment of the intellectual property to your company. And if his staff doesn't complete the work then you need some recourse for the lost opportunity in wasted effort.
If you were to accept the deal as presented, you'd be getting what you pay for, sub-prime work. The way the deal is presented, he's dipping twice, once for some reduced amount of cash, and again for some amount of equity.
I'm not against trading for labor, but the deal needs to spread the risk, not shift it all to you.
I'd walk. He isn't a funder but rather a service provider, and you can probably get a better service provider.
The other problem is IP. If he hires his team to build the product, then it might turn out to be his product.
From my experience - simply NO!
It sounds like this person wants to benefit from both sides of the coin. Typically an investor will "invest" with cash... there are situations where the investor will invest without cash by earning equity via their time and/or resources from their own company, contacts etc... Overall, mindful companies try to get investors that don't simply invest money, but also provide a value added by being able to help in the business - for free! Meaning, if the "investor" is investing, he/she will NOT charge for their services nor will the investor charge for a service, ask for a percentage for said service in the form of equity... this person is trying to take advantage of you... now, it is possible that the individual may believe that the service they are offering is a highly "reduced" rate, and in lieu of the difference between the regular price and the discounted price he/she is charging you (the company), the person may be stating that the spread (value) is worth the 30% of your company. I have my doubts on this one even if it were true... at the end of the day, the investor is supposed to invest in the company with the hopes that it will grow and they will benefit from it. There are many investors who are sharks and try to get as many shares of a company as possible any way they can. This person seems to be trying to grab a chunk of the company without any money (skin in the game) down... seems a tad unfair least to say unusual for an "investor".
Pass on the offer. He's using the old "Detail them to death so it looks like I'm a real expert" negotiation tactics. Working in the software business myself, I have seen how easy it is for estimates to be either wildly inflated and wildly off. Has he placed a cap on his expenses, or is he going to come to you in 3 months and say, "My projections were off, you need to pay more"? 2200 hours to build a blogging platform also sounds wildly off, there are plenty of platform and modules that you can add to websites that would be 1/10 of the work time.
This is completely nonsense. I have worked with three start-ups and took care of development cost against equity. I never charged anything to my partners, its a joke that you make money and get equity. I you believe in idea be partner if not then charge but not both its cheating... this is how feel if someone does to me..
I'd shop around, though everyone in software will quote a different price.
I, myself, have offered a similar deal to another 'entrepreneur' and yes, I did it for free... I totally got burnt and massively regret doing the deal.
I spent months of my personal time working 12 hours a day 7 days a week to get the project done, massively investing in the project, whilst the 'entrepreneur' sat around and did not a lot. No where near as much as I was.
He had nothing invested in the business.
If you have nothing invested in your business, then you don't fear the failure and/or work yourself to death to get it started.
So, it's good for you to have to pay to get something started.
I don't know the actual cost of building your software, but if it's a blogging site where you are blogging then it's cheap; if though, you are creating the blogging technology from scratch then that is hard and has a cost.
Him asking you for money is there a guarantee to him that your truly committed to the startup, though the money should be as a capital investment into the business and not into his company or his tech team.
Also, Steve is correct in saying, an investor invests, you can utilise that capital in which ever way you feel fit for the success of the business.
Though I don't see anything wrong with a software house investing their time / resources and therefore money, as a capital; his employees still have to work and pay rent.
You really need to know and understand Him as a person, is he the right partner? if you like him, honestly, you're better off going forward and not trying to break it... because opportunities take time to create and it may be many months before another comes along.