20% equity for introduction to a major client
I have built a product in the past 4 years for traders that is being used by a few accounts. I haven't done any marketing at all so far, the few clients using it are a few beta testers that have given me feedback to get the system to their liking and became full cutomers. I am about ready to give it to the many trading groups I know. Here is my question:
I am approached by one of my partner associates who wants 25% equity in my business in exchange for him introducing me to a major client who he thinks would quadruple my sales pretty fast and allow me to market my product to bigger names. The problem is that his estimate of my business worth is inaccurate as I haven't given the product a fair try yet, so his claims may be unfunded. Also he doesn't care so much for income on his introduction, meaning if I make money on his account I could very well spend it on expanding my business instead of paying him, all he really wants is 25% in equity so that he would participate in the sale of the business or if his account decide to ask for exclusive use of my product. I am having a really hard time on deciding whether to go ahead with it, since it would make me only a 58% partner going forward. At the same time I don't want to be missing on the deal of the century.
Marketing Sales Software Equity Business
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Your title says 20%, but the text says 25%. Just FYI. – rbwhitaker 13 years ago
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warning - every deal is touted as the deal of the century. – James 13 years ago
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Don't give equity for a promise of something that may turn out to be a good thing... if you think this is a good route to go set up the arrangement so he only benefits if it's successful and works and due to his efforts like the vesting example. Don't ever just give it away. – Ryan Doom 13 years ago
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Don't give ANYTHING in terms of equity until you've received something first! An introduction is worth very little. If you're going to give something, do a revenue sharing deal. Equity is your power; don't just give it away. Everyone is going to try to take some from you as soon as it becomes worth something. Revenue sharing! – Frenchie 13 years ago
3 Answers
Don't worry about dilution - worry about bringing on the wrong shareholders.
A person who wants 20-25% of the company (not the deal) doesn't sound like a good partner. He doesn't understand what it takes to build and manage a company and is driven only by money (his desire to participate in the sale of the business), which means he'll be flaky in tough times and won't provide long-term value. Moreover, he's asking for a share for an introduction that may or may not result in a sale, which shows his poor understanding of how business is done (introduction are valueless if they don't produce anything).
Thus, if you want to try the deal, offer him commission for the referral, which is the standard business practice, but if your business model is a subscription then you'd need to agree how long he would be receiving the commission.
Whatever you decide, remember that the No. 1 rule of negotiations is being always willing to walk away because the one who wants the deal the most is going to give up more.
If you decide to give equity, it should vest over accomplished milestones. For instance, 5% for introduction and 10% if sales double from sales derived from the partnership and 10% if it quadrupled over a specified fixed time period.
They way you are putting it makes me (unrealistically) think your guy is really dumb or that he considers you really dumb. In both cases just ignore him, you won't be missing ón any 'deal of the century'.I don't want to be missing on the deal of the century.
More realistically, he would be testing the waters. Probably on behalf of his company. That company is probably looking to switch to other competitors of yours and should you answer positively, that company will probably dump you for the competitors. So don't bite :)
Good luck
