Valuation Of Non-Existing Product/Business

Out of a team of three, two of us have decided that we need to part ways with the third partner. We want to buy her out, but we are struggling to value our venture and, therefore, don't have a clue as to what to offer. The venture is a website that is not yet live (planned for end of September) and we haven't even considered what the revenue model will be. To further complicate things, we haven't yet signed an Operating Agreement, but we are willing to honor what we agreed to orally.

The question is this: how do we value this company? The site isn't live (and therefore has no content) and has no revenue model. Is it even possible that it's worth more than $0? Should we just pay this partner for their time spent and/or what she produced?

For added background, this is a follow up to this post.

I'm looking forward to hearing your answers!

What you described sounds like a lawsuit waiting to happen -- only, of course, if the venture succeeds. Come up with something fair, could entail a percentage of first year revenues. However whatever you decide, get it in writing, as a contract, and with a BINDING arbitration clause (google the American Arbitration Association).

Note that the clause must be correct in content and IN FORM. For instance, in some states one may have to type in capital letters at the head of the contract that it is subject to binding arbitration, or the clause will be defective in form, hence useless. You can check the requirements for where you are at a local law library. AFTER doing that, consider getting some legal advice from an attorney.

But watch your costs on this. Best is to interest one (a young computer-savy one?) in the potential of your business and ask him to serve on your advisory board of directors. Initial attendance is not paid, but will be upon revenue objectives being acheived.

Regaards,

James Hamilton

For the project, the more time you spend examining the past and arguing amongst yourselves, the less likely you are to succeed, or even to enjoy the attempt. And unless you have another good friend who's a lawyer, I wonder how much time and money you want to devote to this.

As I understand it, you've already agreed something sensible - a vesting schedule. So surely the natural way forward starts from that point.

The outgoing partner has earned a share - that's how you have already agreed to value your work. Going forward, the person leaving will be diluted relative to the continuing partners, but will remain a stockholder.

If you want to negotiate something different, that's for the three of you to discuss. There are lots of possible ways forward - and as you suggest, the toughest one is to try and come up with some idea of present value. Your first view of any objectively-grounded value may not be until way downstream of here and now. And if you succeed, the partner who is exiting will get a payday. Where's the problem?

You want to boot a partner a couple of months before launch?

I can see the law suit down the track... "If the venture wasn't worth anything, why would you want to go ahead and launch it?"

It's almost impossible to help you get some sort of valuation since we have no information about what you're doing. I have no idea if you've done any sort of projections.

I'd personally suggest that you sit down with your third partner and find out their side and whether there are terms that are acceptable to them and work from there. If this has been a long project and you're about a try to cut a partner this close to the finish line, expect a lot of drama and/or unreasonable demands/high figures.

A possible solution may be a smaller ownership share in the business for the person being removed until you can come up with a valuation.