Questions

Deal: Outsourced Product Dev - proposes 12% vested equity for $15k discount + free branding & marketing. Should I accept? The product dev studio I am outsourcing the initial development to is happy to give a discount of $15000 for 2 years vested equity of 12%. They will also help with free branding and marketing efforts totalling to 95 hours. Plus key contacts with investors and partners. The studio group is credible with good clients list and second time entrepreneurs.

There are two parts you need to consider in making this decision: 1)the total value of the discount and branding & marketing services to your company and 2) the value of your company.

Part 1) The value of the services is an "opportunity cost" of using this company. If you were to hire another firm with the all of the same qualities, skills and timeline, how much more would you have to spend in cash for the same development, branding and marketing services. Call this figure X

Part 2) Develop your valuation for your company that would use for an investment at this stage. Call this figure Y.

If X/(X+Y) is greater than 12%, then you should do the deal, otherwise you should not.

Example: If all of the services are worth 20K to your company, and you value your company at 140K, then you should be willing to give up 12.5% and would take the deal. If all of the services are worth 20K to your company, and you value your company at 150K+, then you should be willing to give up 11.7% and would decline the deal


Answered 3 years ago

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