A little advise in dividing the pie (share)

Discussion in 'Growing and Managing a Business' started by santaclaws, Oct 15, 2012.

  1. santaclaws

    santaclaws
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    Dear all,

    First off I am new here. (just registered today)..
    But there is something bugging me.

    I will start the company's current situation like this:



    Our shares were: 28% (me), 26% (2 marketing guys), 19% (1 marketing guy)

    But then after a while of running the business, it came to a time where we really need investors as we are short of funds (which one of the marketing guys manage to find)

    Around last week we had a meeting and the marketing guy (AA) told us that a friend (a businessman), is interested in investing in our company.
    BUT, the T&C goes like this:


    Now my real question is..

    Am I (and the other 2 marketing guys) being set up?
    If so, what should we do?

    I know we can counter-offer, but as a personal opinion, I just dont feel that its fair they take 51% just like that just because they are providing the cash-flow (no limitation).

    Please advise.
     
  2. Fergal

    Fergal
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    Welcome to Business Advice Forum santaclaws, thanks for joining and posting your business questions.

    It's difficult to know the answer to that, without knowing the details of the investment and what the potential investor is bringing to the table. What you should probably do is put a valuation on the business as it is at the moment. Then consider the level of investment that the businessman would be making and evaluate whether or not that investment level warrants the percentage share they are seeking.

    You should also try to meet the businessman in question. Get his views on the potential deal first hand and form an opinion as to whether or not he is someone you could comfortably work with to grow and develop the business. Does he bring anything, such as specific industry contacts or skills to the business, in addition to his potential investment?

    Is the marketing guy (AA) capable of leading and managing the business? There's no point in obtaining investment if it means putting someone in charge who is not fit for the job, a company with an incapable person at the top is not likely to succeed and survive. Obviously I don't know anything about AA or his capabilities, but it is something that you will need to consider.

    As with any situation in business, you have much less negotiation power if you have only one option on the table. It could be very helpful to see if you can find another investment offer. Perhaps your bank might finance the business expansion or maybe even there is a government funded enterprise support agency in your area who could offer financial aid.

    Good luck with it and please do post back with your thoughts.
     
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  3. santaclaws

    santaclaws
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    thank you for replying. :).

    we tried seeking for other investors but they rejected us. only this guy (AA's friend) is willing to invest.
    the reason they gave was "i am providing the cash, i should own 51%". which i find it to be unacceptable since they are just pumping cash in and not doing the work.

    shouldn't the fair amount be at least 20% of the share instead of 51%?

    with them owning 51%, means legally they have the right to screw up everything (sell of company, etc) as they are the highest for the next 3 years (if we signed the legal contract).

    well, for being a leader, i think he can do it. but what i felt about this is that i was the brain behind all these. i should get the most share out of it and not him. while i was programming the whole site and even paying higher expenses than the rest. all he did was sit around and do research of the marketing procedures (ofcourse now he is doing his job).

    i do not mind him being the leader but him taking 51% (and shared among the investor) just like that.. sounds a little greedy, right?

    he did say he will provide proper credits, but whats the point of that when i am having very less %?
    i just felt cheated out but he still want to give me some amount to make me stick around.

    he also did mention that the responsibility level for me, BB and CC will be very very less as we do not need to deal with the investor (giving answer in case something f*cks up).

    i understand that the investor will trust him instead (considering they are friends) of us as AA is the closest to the investor.

    _________________
    the 4th marketing guy came in after like 7 months thats why he owns 19%.

    before the investors came in, AA requested for equal share without even consulting any of us (meaning he just blurted out what's on his mind).. but i have already advised him in the future we should discuss sensitive issues.

    but now he said the investor requests for 51%.

    i really dont know if i should convert myself to be a sleeping partner or just quit.

    please give me advise. thanks!
     
  4. Mark T

    Mark T
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    I think you should go with Fergal's first option -

    Do your own math as well, is 51% reasonable enough? Calculate, evaluate, but do not instigate. Get your 2 remaining partners opinion about it. Are they okay with it? What are their other suggestions?


    Regards,
    Mark T.
     
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  5. santaclaws

    santaclaws
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    i guess i will ask them in the next meeting.
    yea i asked one of them..
    he said that he felt we got screwed over a little. but just accept it since there is no risk (for me, BB, CC) while the risk will be high for (AA)..
    he jsut mention to get back our money's worth..
     
  6. ArcSine

    ArcSine
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    "Putting in the cash", per se, doesn't necessarily imply 51% nor any other number. The correct (or at least acceptable to all) percentage on a buy in is determined by the amount of cash relative to the current and prospective values of the company, and relative to the values (tangible and intangible) of the other partners' inputs.

    Same answer.

    If feasible, approach it from a "with / without" (accept proposal / reject) analysis. What does it mean for the company, and for your personal cash flow, to accept the offer? What does a little number-crunching imply about the going-forward income, growth, sale / cash-out value, etc., if you show AA the door? (In the latter scenario, remember to include that you'll likely have to buy out AA, with the terms of such (pricing, time line) being defined in your partnership agreement.)

    It may be that the "without" picture looks better in the crystal ball. Perhaps the cash infusion won't do for the company anything the remaining three guys couldn't eventually achieve themselves with some perseverance, hiring the right help, and talking to the right bank and investor. You mentioned that you were the sole technical guy in the bunch, and so it may be that AA & investor need you more than you need them. (If you do restructure to exclude AA, and/or start from scratch without him, make sure you're not using any intellectual property to which the predecessor partnership has valid title. An attorney's counsel on this point would be good.)

    Or it might be that (counterintuitively, probably) the deal on the table is actually a sweet one from where you sit. E.g., I'd rather own 20% of a $1M bottom line than 40% of a $100K bottom line. Similarly, if Cash Man is willing to put $X into my company, whereby X represents (say) 65% of the economic value of the post-investment company, yet he's willing to only take a 51% share for X, well, caveat emptor.

    Another possible result of your analysis is that you see that the company---and all the partners---would indeed benefit from the cash infusion, but at such a level that some lesser cut (45%, say) to AA and the investor would be economically fair. However, they likely came up with 51% because they perceive significant value in having a controlling interest, so your counter-proposal would have to clearly demonstrate that even at (say) 45%, they'll be getting a return on investment that solidly trumps anything they could get elsewhere for similar risk.

    In fact it doesn't sound like they arrived at the 51% as the result of some careful valuation analysis themselves. Rather, it was probably just some rule of thumb the investor overheard at a cocktail party ("Oh, I never invest without owning at least the big five-one."), so it may indeed be that if you support your counteroffer with solid analysis they'd be willing to listen.

    Side note: If you decide to go with their offer, you must have an experienced attorney vet the proposed amended partnership agreement, on your behalf, particularly with respect to two issues:

    • Make sure AA & investor cannot drain off the company's net income via salary raises, bonuses, and ostensible "perks" ("Sure, sure, it's good for the company's business for my wife to be seen about town being driven to the grocery store in the company-paid limo!"). Absent a good set of checks and balances, it's easy for a 51% owner to hijack 100% of the bottom line.

    • Also make sure provisions are in place preventing you from being squeezed out unfairly, an eventuality which usually occurs just prior to the company being sold for a mountain of cash. If you are squeezed out the agreement should mandate that the company is to be independently valued at such point, and you are to receive your share within a reasonable period of time (with a reasonable interest rate applying to any deferred payout). Also, if the company is sold within some defined subsequent period of time, such selling price is to retroactively be given an appropriate weight in possibly re-calculating your payout share.

    On a completely separate note, AA's "sign the deal or I walk" ultimatum has a bad smell. Just sayin'. Best of luck with it, and let us know how things move along.
     
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  7. santaclaws

    santaclaws
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    thank you very much for the long advise.
    yea i guess i will discuss this and will provide a counter offer.


    i will update the thread in about a week after the next meeting/signing of the contract.

    i am not really thinking this issue over my head is because im running several businesses as well.
    but its just that this was my first business and i started it all, so i want to "fight" a little for my own hardwork
    from the beginning.

    BY THE WAY,

    AA did mention that even though our shares are smaller that he has, but when the money comes, he promised us
    that he will divide it among 4 of us equally..

    SHOULD this be stated in the contract? Just to be on the safe side..
     
  8. Fergal

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    I would say yes, definitely, there really is no reason for it not to be in the contract.
     
  9. masterbizcoach

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    Well, that would be depend on the ROI and the investment that the person provide.
     
  10. santaclaws

    santaclaws
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    okay. i will update this thread after the next meeting. thanks :)
     

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