Questionable Value Proposition(QVP) | Hacker News Reader

Questionable Value Proposition(QVP)

2 pointsQFV11 comments

I have a product prototype. Here's the proposition I am making to investors:

I will give them 5% equity for $1 dollar under the following conditions: Every year for the first 3 years, they are required to buy an extra 1% of equity at the value of the revenue for that year.

For example:

Year 1: Say revenue is $0, then they will buy 1% at $0 dollars, so free.

Year 2: Say revenue is $1 Million, then they will buy 1% at $1 Million.

Year 3: Say revenue is $10 Million, then they will buy 1% at $10 Million.

So, they will have paid $11 million for those 3%.

I just want to hear what people think about this.

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This doesn't work.

The company will be valued primarily on the final year's revenue. To be a "good deal", the total amount of revenue over 3 years must be <= 8% of the valuation. Since companies are normally valued at 3-5x revenue, that means that the final year's revenue represents 20%-33% of the valuation. No one will ever pay 20% of the value of the company to own 8%.

Suppose that I gave away 28% instead of 5%, where they would be required to buy 1% every year at revenue value for 4 years instead of 3.

Would that be fair?

Why not offer them 0 for 0%, wait a year, see where you are and raise money at a fair valuation?

That is certainly an option. What is unfair about my proposal?

Not unfair but turns it into more of a gamble for both sides. You don’t know how much investment you’ll get until you know the numbers so how do you plan? Your company maybe worth more or less than the proposed investment ratio.

That is the point. The gamble. I want to offer as low a risk to the investors as possible at the cost of supporting me "full force" sort-of-speak should I make significant progress within three years.

Ah I see. My main issue is say you get to 10m then they have to invest 10m but what if you don’t need the money? Or is it more about their skin in the game?

What if you only do 500k but strategically you could do with 10m because of a pivot? But now you’ve given away the equity so it’s harder to raise?

For this particular venture there won't be a pivot. It is cut and dry. One thing and one thing only.

If the money is not needed, it becomes reserves for the corporation. Part of it might go into research.

Given the sector of this venture research of a very particular kind is required, so cushion money can be well allocated over time as needed for these research efforts.

What I want is security in a very specific form. Namely, that should things go well capital shall be plentiful and available. I do not want to worry about this.

What’s the point? Are you asking a question? It’s not obvious why you posted this.

Plus, you forgot the initial 5%, so you are really exchanging 8% for $11M, right?

Yes, but, if the company makes 1K revenue in the first 3 years, then then its 8% at $1K.

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