I have a business idea, pitch and domain name that has been accepted by a company to take forward.
The deal they are looking for are:
1. I pay 4k upfront
2. We have a 80/20 split in my favor until I recover my 4k
3. After that we run at 50/50 split of revenue
4. We have joint ownership of the company (50/50 split)
Is this normal? Should I be willing to give up a 50% stake in the business vs having a separate arrangement on a 50/50 revenue split but no stake in the company?
If I understand what you’re talking about, you have an idea, perhaps sketched on a piece of paper, perhaps documented more explicitly, a domain name you’ve registered for the associated Web site, and that’s about it. I don’t read that you have working prototypes, that you have a site up and online for people to visit and learn about your idea, or anything like that.
Given that, honestly, you haven’t traveled very far down the road of building a viable, profitable business.
That may sound harsh, but one thing I’ve learned working with entrepreneurs for years and years — and doing my own startups — is that ideas really are a dime a dozen. It’s easy to come up with a good idea and even take the step of fleshing it out and poking around to find a perfect brand identity or just domain name.
But the hard part is building a business out of an idea. Indeed, many startups seem to flame out before they even start because their founders don’t understand the difference between a really cool idea and a business, an entity that has employees, an accountant, customers who pay money for the service or product, a shipping and distribution channel, a Tax ID, and so on.
Which leads to my main observation about your proposed deal: 100% of nothing is ultimately worth quite a bit less than 50% of something that’s alive and might or might not hit the popular zeitgeist and become a success.
Since I have no idea of the level of complexity of your proposed business, I have no idea if $4,000USD is a ridiculous amount to pay up front or an incredibly good deal, but since there is the expectation of being paid back, then it’s fair to assume that the product or service is going to have a price tag. So if you’re right in your assumptions about your business, that $4K could be a smart investment and be paid back quickly by customers.
However, don’t underestimate customer momentum. If you’re introducing a new product or service into a space with many options and alternatives, I guarantee that it’s going to be harder than you think to gain visibility and create new customers. Just assume it. Go back to your spreadsheets (if you have any) and divide everything by four.
Now, how long is it going to take for you to earn back that initial investment?
Finally, is it a good deal? That depends on what your other options are. For $4000, it’s a small enough amount (versus, say, $20mil) that it’s worth giving it a shot. If this is your best option, I’d go for it and give up 50% of future revenue (though not 50% of the company ownership) in return for doing it rather than sitting on the idea and never really giving it a fair shot.
Good luck. A tricky situation, but exciting too.