Possible power struggle / deadlock advice | Hacker News Reader

Possible power struggle / deadlock advice

2 pointsoneloop1 comment

I've started a small business about 7 months ago. Since then I've done about £110k in revenue and £11k profit (I'm in the UK if that matters).

This is a very cash-intensive business and I'm struggling with cashflow. Cashflow finally turned positive in January but now I'm not being able to grow because all my cash is tied up in my awful payment terms.

Recently I had a conversation with a potential customer and we came to the conclusion that it would be beneficial to partner up. The deal we discussed was the following: they take 50% equity and 50% profit share, and in exchange they bankroll me (this is on top of the fact that I get a new customer and they get a new supplier).

I know that HN is used to thinking in terms of "cash for equity", but notice that this is slightly different. It's more a "very big zero-interest loan for equity". I estimate that without the cashflow constraint I could scale this up to about £1m/month in revenue in a year's time.

My concerns are about possible power issues / deadlock situations. I'm a single-guy company and they're a 20 employees company. If it comes to lawyering up, I'll get screwed.

Basically, how do I avoid getting screwed and/or deadlock?

The proposed partnership basically amounts to your becoming part of your customer's business. The hard facts are:

+ Such a partner can leverage lower prices for their business and under the deal, you get half of the lower price and half of whatever higher price you can get elsewhere.

+ Such a partner is in a position to influence the structure of deals with their competitors in particular and other potential customers in general. This may kill some deals while lowering prices to others.

+ Such a partner can put the needs of their business above those of other customers in terms of resource commitment.

+ In general, this looks like someone who is optimizing for their interests over yours. That's not a good basis for a partnership.

+ The terms are onerous as described. If a business is in dire straights that's not uncommon. Decide if it is, and determine if it's better to walk away or start over or essentially work for $0.50 on the dollar for the new partner.

My gut tells me that if the potential partner thought the business was mainly cash positive, they'd make a traditional loan against future revenue and if the business was more growth positive, they'd make a traditional equity investment.

That they want both is worrying. On the charitable end, it fails to recognize that your long term incentives are diminished by the deal (even if your short term incentives might not be). On the uncharitable end...well the terms are not favorable.

My personal experience is that people who want to exchange a great deal up front for the promise of lots of business down the road are full of shit and are the worst sort of customers. Bad clients are worse than no clients because they impede finding good clients: e.g. those who pay full rate and on time.

Serious people know the market and negotiate from there: only amateurs and grifters express absurd expectations. The absurdity of the offer, not its merit, is what makes it hard to come to terms with.

To put it another way, does £6.5k profit on £110k in revenue over 7 months sound better or worse? That's what's on offer.

Good luck.

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