Entrepreneur In-Waiting, valuing a start up business

After Years of having great business ideas and insight into the betting industry I have decided to bite the bullet and go ahead and start up my own business E-Commerce Business.

I have a number of potential investors but am unsure of what I can ask for in exchange for foregoing any % within the business.

The premise of the business is a very good one and I can leverage the many number of High Net Worth individuals that are likely to be clients, I however am not able to invest any funds into the business.

Where doe one start here? can I factor a wage (albeit a small one) into the projected cash flow within the financial plan, can I ask for a one off ex-gratia payment further to the money invested into the business and is it a matter of valuing the businesses potential and then dividing to decide which percentage I want to forego?

Any assistance very much appreciated for this newbie!

Without getting equity in a business you would need some other benefit for someone to risk their money with you. You could do a % of sales over some time period.

If someone gives you $50,000 maybe you agree to pay them a % of sales until they get paid $150,000 and then X% of sales for 3 years after that. Or setup some payback model that gets them some benefit to loaning you the money.

Or give them X% of equity but you have the option to buy them out for 3x their investment price within the first 3 years. So they either get that % or if you are booming you can buy them out based on some pre-determined price.

Guess those are a few options for not giving up direct company equity.

When searching for seed capital, delaying valuation till the concept can be validated and a institutional raise can be secured makes sense. Many at your stage consider a convertible note.

Here's how techstars does it. To learn more about convertible debt, a good series on it can be found in the askthevc archive.

First there are the basics : you start by issuing founder's stock to the founders; then you issue stock for cash to investors.

Your founder's stock should vest over 4 years (if you are running the business full-time). You could figure out the difference between what your market value is, and what you expect to be paid, and that is the value of the founder's stock at the first investment round (you should actually issue and buy your founder's stock at a tiny fraction of this price). A typical number may be around $50,000 per year or $200,000 per founder for an attractive business with experienced people.

I would recommend paying yourself a salary ... and a small one. It depends how senior you are, but for someone starting out $2,000 per month is fair; for someone very experienced who could be in a senior role at a large company earning well into the six figures, and who has kids, $5,000 per month is more usual. Whatever comes across as a 'starvation' salary.

A good cross-check on the value of the company at the moment of investment is that normally you issue 10-25% of your shares to the first round of angel investors. If you are raising $50,000 and you value the business per-money at $200,000 then those numbers are about right. If you are raising $200,000 then there will be an impulse to value the company higher.

P.S. Note that some investors (I am one of them) apply a strong 'single founder discount' to startups. If you are starting the business alone, some investors will back away until you have a team around.

You believe you can engage High Net Worths with a service they will value highly. Well, do it. Work your story up, and take it to your target market, one at a time, and find how that story works, and who is eager to be your first customer.

If you can't turn the excitement of (say) five wealthy individuals into a funded business where you keep a major stake, don't waste your time pitching investors or researching fancy funding routes.