Questions

How do I calculate the amount I need to raise for 24 months to start a venture with 3 partners & divide the share value, investment amount etc.?

I work as a Digital Consultant with 2 brands directly & head an agencies operations as a salaried personal. The agency & I have an understanding. Also my earnings from consulting are higher than my earnings from salary on a monthly basis. I get my clients for consulting via referrals and the period is usually about a year as I focus on the deliverables of building a brand. However, currently I spend about 20% of my time on consulting projects & 80% on the company I work with. I always think of letting go of the company and starting my own venture but I fear my weaknesses in business development would consume me. My clients have been with me for 2 years and have seen great results. My main fear has been in valuation of a startup, the % division in partnership and capital contributed by each party.

3answers

(built Spheric / 30+ person consultancy / sold in 4 years)

I'm going to assume you're thinking of starting a service company vs. a product company (even though most service companies do have ambitions of some day having a product, it's best to stay focused on this for now - they are totally different business models.)

The truth is, if you time things right - you can leverage new consulting agreements to help jump start revenues and pay yourself from that. You don't need 24 months of capital, maybe 4 at most.

Just be sure to negotiate fast payment terms with your clients (invoice weekly, net 0, wire transfer) - that should help reduce your risk.

If you feel you need 24 months, then you probably don't have the risk profile to build a company - no entrepreneur I know ever had that much or even have that now as they scale.

As for % division in the company - it all comes down to risk. If everyone's going to contribute evenly to building, growing and managing the business - then spit it evenly using a vesting period (4 years, 1 year cliff, monthly vest). That way if anyone doesn't work out, and leaves within the first year - then they don't get anything. This is very standard.

As for the valuation of the company, it's essentially $1 until you have someone willing to buy some equity/shares for more than $1 dollar. Again, I'm assuming a service company (not product). Everything above needs to be revisited if you're looking to raise equity funding.

Overall, the best financing is customer financing - trying to lock in long term (retainer) contracts with 2-3 customers before you jump ship is the best way to proceed.

As for equity, keep it simple .. for now, just start the company yourself and convince others to start/join and see how it goes for 3-4 months before you do anything legal. Many people won't last and it'll save you a bunch of legal money. Just do contract initially for everything. If they can sell, give em' 10% of the profit per deal up to 6 months.

Again, keep it simple.

Hope that helps. Always up for a call if need be.


Answered 6 years ago

Raise from who? If you mean raise from the outside world all 4 of you are going to have to pour love, sweat and tears in before the outside world is going to even look at you. If you don't take the risk upfront, no one else will. Until you have, at a bare minimum, proof of concept your valuation is irrelevant. The upside is you have other sources of incomes to survive in the interim.

As for the % division in partnership - easily sorted by how much energy/time you're each going to put into it. Did someone start the concept or you all did together?

As for capital - put as little in as you can UNTIL you have a valid concept that's been market tested


Answered 6 years ago

Reading through your questions, I see two things. Opportunity and fear. First off you have two solid clients and they are generating income, but I see a fear of not only the business development side, but of all the details of starting and running the business. You're letting this stop you from moving forward. Honestly, off the basic writeup you provided, I would not be looking to make things too complicated. Starting a partnership is easy, you determine your startup costs (Overhead, Variable Costs, Salaries) for likely 6 months add a buffer depending on the stability of you revenue source. Once you have this, that's the investment capital required to start the business. Form the corporation, award shares based on the investment capital from the partners, and start working.

Valuation isn't necessary at this point. A service business with no revenue isn't worth much, the intellectual property won't value out to an investor, and the company wouldn't have assets.

If you can afford to live off your agency income, take the money from consulting, invest in the business to grow. Find a business development partner, or employee and get going. Once its stable, leave the agency to run your own company.

Obviously there is a lot more details that can't be covered here, but hopefully this will give you a little to think about. If you'd like to set up a call, I'd be more than happy to oblige.

Don't let fear hold you back, you've proven you have the skills to generate results for your clients.


Answered 6 years ago

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