Negotiating equity
I am a Fashion design graduate and I have been fortunate to work with a renowned designer who shows in Paris Fashion Week.. I have three years experience after my graduation. I specialise in a particular kind of designs which are very new to the Indian Market. I wish to build on this concept and create an apparel brand in India.
I am not an MBA and I do not have in depth knowledge in administration, but I will be able to handle every aspect that concerns product development and marketing.
My neighbour came to me recently asking me about my plans, and he said he would like to invest some money and help. The biggest problem for me is that I do not have any at present that i can invest and I am afraid that all my hard work will be worth nothing at the end as I will hold very less share in the company.
The seed money required to start this would be around INR 20,00,000/-(working two years) and he is offering to invest 10,00,000/- that might be enough for a year.
I am expecting X2 of the total investment at the end of an year to be honest. X3 in the second year and X5 in the third.
My question is - is this even a good opportunity? considering that I do not have any money and might not be able to start my company at all without such help.
And how can I negotiate if it is a good opportunity? And what is my sweat worth here actually?
Thanks
2 Answers
You know, it's not an unusual case.
Often one of the partners brings the know-how (idea, programming skills, specific knowledge) and the other(s) brings money... That's completely normal. And don't worry, your hard work, your idea and your experience are not worthless! Your potential partner has the money but is lacking the idea of what to do with it - hote make a profit with this money. So, generally speaking, you are equal.
The question of equity distribution is more complex and require considering (to do together with the partner) of aspects like :
- risk of failure
- specificity and unicity of your know-how
- role of the "financing partner": only give money (=investor) or participate to the daily business (=partner)
- ...
Good luck!
It is always a good opportunity to have people offering to invest money in your business.
My wife has worked has a fashion designer for 10 years. She learned a lot in that decade (and she lost her investor - me - a bunch of money). My first piece of advice is that you find a business partner. Don't try to do this alone!! Most fashion businesses fail due to poor management of production (I know, this doesn't sound obvious). So find a partner who will handle administration and production, while you manage design and marketing. Or even find a third person to handle sales!
When you have this person (people), work with them on your business plan: not a beautiful one to present - a real plan which is your best guess of what you will do together. Then you will be ready to take the money.
The second advantage of having this partner(s) in place is that your business will then be worth more. In North America you typically value an early stage startup as being worth maybe $100,000 for each full time person involved ... in other words 60,00,000 INR. Maybe as a starting point the number may be a quarter this in India (this is a guess - it's not equal and it's not a tenth). So having two people in the business will make your business worth 30,00,000 INR and the investor would buy 25% of it for 10,00,000 INR ... which works out. (Another rule is you typically sell around 10-30% of your company in each financing round.)
Make sure when you are drawing up the company founding documents and agreement that you include four year 'vesting' for your and your partner's shares. This vesting agreement will cover the sweat. The investor is putting in the cash you will use, so they get their shares immediately. I would also suggest paying yourself and your partner a very small salary. Your contribution to the company is much more than the salary you don't take: it is the value you will be creating in the company.
Good luck!
