Someone wants to invest in my project

Someone wants to invest in my idea. I'm building this project and it's a very good idea. I'm thinking about starting my own company for this project. This person heard about my idea and he is very interested. He offered a big investment in a company that doesn't yet exist.

How do I pay him after he invests? Does he get a percent from something? If he invests 50.000€ in my company what does this mean? When I earn another 50.000€ what does he get out of this?

You have a fantastic idea. Congratulations. The early validation of someone offering to invest in it is great. The decision to accept investment is a big one.

1. The first question should be "Do I need it?"
2. The second question is "Do I need it now?"
3. The third question is "Is this the right person to receive it from?

Remember, the earlier in the development of your idea that you accept a third party investment the greater the likelihood that you will have to "give away" more of your company/idea than you feel comfortable.

Why? Because you see the possibility. You see the idea as a reflection of all of your intellectual property and experience. You know it is worth something.

The investor sees potential. And from their vantage point the value they bring (cash) is something that can make the potential happen.

My assumption that this is an equity investment (unless you have personal assets to gaurantee it as a loan, or there is a existing revenue stream which can be dedicated to payback) As an equity investment you are becoming a partner with the person.

So how to respond?

• Let him do the work. Let him make a proposal to you. See what terms/conditions he proposes.
• Unless you are starved for the cash at this stage, play cool -- make it clear there is lots of work to be done and you have a plan and are on track -- the more hungry you are perceived to be for the money the more valuable it is.
• Stagger the investment so that performance at milestones triggers another amount of money. The later stages can come in at a different return.
• Get to know him and assess, evaluate, learn if this is someone you want to be partnered with in the launch of this business.

Well the unhelpful answer is that it is worth what ever you agree it is worth.
The advice is make sure you agree on paper early.

I have answers the rough split concepts a few times Sharing workload between partners and what to be careful of and sort out early Apart from that you can talk about it as percentage ownership or I find it easier to think of it as having a number of shares ... say 500,000 shares and each share is worth $1. You then sell him 50,000 shares and agree that you get around 50,000 shares yourself. You can the use the shares over time to allow other buy ins or pay people X shares per month when cash it tight. When the company pays dividends or is sold each share sold then has a new value ... its gone from $1 to $10.

Its the same thing just a different way of thinking about it. Hope this helps ...

Here's the basics on equity:

If he writes a check for 50,000, he will write it from him TO the company. The company will then have 50,000 in the bank. In exchange he will get a certain percentage of the company. That exact number depends on the negotiations between you and him.

Premoney valuation: This is the value of the company before he puts money into it.
Post-money valuation: This is the value of the company after he puts money into it. It will always be premoney valuation + amount of money.

His percentage will depend on the premoney valuation.

If your company is worth 100,000 before his money, then his 50,000 would make it 150,000 total. That means that he has 50,000 / 150,000 or 1/3 of the company. You would retain 2/3.

In the future, if the company sells, he will get x% of the sale price (1/3 in the example above).

If you make a lot of money and decide to withdraw some from the company, for every 2 euros you take out, he will take out 1. (if the numbers above hold).

For 'idea' companies, coming up with a pre-money valuation is extremely difficult and purely subjective. You will need to negotiate this term.

Once he owns a part of the company, you will likely never get it back. Only allow him to invest if you NEED the money to get started. If you can, fund the company yourself and keep 100% of it.

Figure out what your company's equity will be worth, and figure out what percentage he wants, and for what amount. If he invests $50,000 and wants 33% of your company, then your company, by that calculation is worth $150,000.

Typically an investor would get dividends on equity and some board seats, and more.

Or does he want to loan you that much money for your company, perhaps with the loan amount convertible into stock?