Should I handover a stake in my business in return for help?

[cqueen]

The initial message was deleted from this topic on 09 July 2014 at 17:36

[Don]

In order for small businesses to grow you need the right team.

This guy would become a minority shareholder but would be "on the team". You should discuss how much of a role he will take in the business. You might find having a "partner' beneficial if he will bring his IT expertise to all the other aspects of your business as well.

30% stake in a business? I'd be wanting a very fair proportion of his time for that. How much does he envisage giving over to your business?

[Wilmslowboy]

Why not grant him an option to buy a stake at a set price, which is valid for a couple of years

If his efforts don't come to anything (or he loses interest etc) then he will have little motivation to excerise his option.

there is no more or less risk on his part (some tax implications) you retain control until he excerises, which he will only do if the shares are worth it (business gone up in value)

[jammy_basturd]

Conversely, he's asking for 30% of a business that isn't making any profit. So there is the risk for him that he could create a new website and spend countless hours on SEO, that it still doesn't vastly improve the figures and he won't get back anything for his efforts.

I'm surprised someone has offered to do the work for free and only a 30% stake in a break-even business. It also sounds like, without someone like him the situation isn't going to change much in the future - so any future success could be equally contributed to both yourself and him.

I agree with the other posters though, his role needs to be absolutely defined before you go into this agreement as it can be extremely hard to remove a shareholder from a business.

Another option may be to ask him whether he'd work on a Cost Per Action or results based invoicing. So you only pay him once the results start coming in. Then just take a loan out to cover his expense.

[singlecoil]

Forget (for the sake of this discussion) what you have put into the business. Then ask yourself how much the business is worth right now. You say it breaks even, but you don't give any details, do you mean it breaks even once you have had a substantial salary out of it, or when you have paid yourself a subsistence wage?

In any case, I think the correct way to look at it is to ask how much it is worth as is, then ask yourself exactly what you would be giving away if you let him have 30%.

In your position I believe I would be looking very favourably at the deal.

[cqueen]

Good, these are things I want to hear. I want to be confident that this is a good deal and not one sided.

I just worry what would happen if things didn't go as well as predicted. i.e. not much improvement only I now own 30% less.

[VEX]

Are your margins good on what you do sell?

If they are why not give him an agreed percentage of the profit on anything you sell over and above your break even point.

That way you haven't lost anything if he doesnt perform.

V.

[jonamv8]

£3k is a fair amount of SEO a month. Im in this arena and regularly work under sinilar arrangements. An idea of your product area and the market you are targettingis key to advise properly on your scenario IMO

[Pot Bellied Fool]

It's a good sign that he's willing to put his money where his mouth is - he only gets any real value if his work does actually build the business & not many SEOs will do that - which is a bit of a damning indictment on their confidence!

I work that way with one client and it's proven to be good for both of us so I think that the model itself could work but as an alternative, have you looked into affliliate marketing? You have to give a decent commission but you then end up with a load of independants all driving traffic in return for a cut of sales. Saves you giving equity away.

[jonamv8]

£3k is a fair amount of SEO a month. Im in this arena and regularly work under sinilar arrangements. An idea of your product area and the market you are targettingis key to advise properly on your scenario IMO

[miniman]

A big part of the issue is that the site isn't built well at all - it is missing a lot of the fundamental things that help SEO. Before giving away a slice of the business, I'd look at moving the site to something like Shopify.

(which I would do for you for a mere 10% of the business )

[jammy_basturd]

miniman said:

A big part of the issue is that the site isn't built well at all - it is missing a lot of the fundamental things that help SEO. Before giving away a slice of the business, I'd look at moving the site to something like Shopify.

(which I would do for you for a mere 10% of the business )

It depends, if this SEO guy works, and the website does generate 40 orders a day and £150k a year, I wouldn't want it to be locked into a platform like Shopify. I'd want complete control over both the platform and the infrastructure! Nor would I want the Shopify fees at that sort of level.

[cqueen]

He wants to build a complete new site (and multiple other sites) using magenta.

[miniman]

I know what you're saying, but it's a lot to give away on a maybe. Maybe the SEO will work, maybe there's just too many players in the market to get the traction needed. I'd try fixing the basics cheaply first.

[johnfm]

Well, clearly you would stage the shareholding against some sort of target.

So, if he hits your £150k pa target, 30%. If he hits oly half that, less.

Don't just give him a shareholding on a promise of results.

[cqueen]

johnfm said:

Well, clearly you would stage the shareholding against some sort of target.

So, if he hits your £150k pa target, 30%. If he hits oly half that, less.

Don't just give him a shareholding on a promise of results.

Someone has suggested:

30% of profits on anything above what I currently make. Then give 10% of ownership each year provided the targets are met (up to a max of 30%).

[MrSparks]

At the end of the day, 70% of a lot is better than 100% of not a lot. If someone can genuinely increase revenues and are driven (by way of shares) to do as well as possible and you can't do this by yourself, then 70% of success is better than 100% of doing what you're doing. (not that I'm suggesting you're not doing well, you know what I mean!)

But I would agree with the phased equity release, as it's based on a skills scenario it would be prudent to release equity on a target basis to ensure that they can deliver.

Someone will probably correct me if I'm wrong, but true and full control of a company is at 70% so I would avoid giving away more than the 30%.

Wish I had an offer like this!

[jammy_basturd]

MrSparks said:

At the end of the day, 70% of a lot is better than 100% of not a lot. If someone can genuinely increase revenues and are driven (by way of shares) to do as well as possible and you can't do this by yourself, then 70% of success is better than 100% of doing what you're doing. (not that I'm suggesting you're not doing well, you know what I mean!)

But I would agree with the phased equity release, as it's based on a skills scenario it would be prudent to release equity on a target basis to ensure that they can deliver.

Someone will probably correct me if I'm wrong, but true and full control of a company is at 70% so I would avoid giving away more than the 30%.

Wish I had an offer like this!

This.

From his perspective, in say two years time he could have earned anything from £15-30k from you billing you in the conventional sense. However, agree to the equity share deal and all of a sudden I'm thinking that if I put some real effort into making your business a success then I could be looking at 30% share of a business worth heading towards half a million or more. Which reminds me, in your agreement you need to work out what will happen should he want to sell his share at any stage.

Flip side of that, over the next two years you only need to keep doing what you're already been doing, and all of a sudden your 70% share is worth a tremendous amount. Or in two years you could still own 100% of not much.

[singlecoil]

There's a big hole in the logic of the scheme from the other chap's point of view-

There's two ways of taking the profit out of a business, wages or dividend. Usually it's a mixture of the two, but whichever it is it's whoever runs the company who decides the proportion.

As the OP would still have control he could decide to take most of the profit out as wages so that come dividend time, the other guy would get 30% of very little remaining profit.

[DSLiverpool]

You have 100% of a business that makes sod all, it's better to have 70% of a profitable one but it won't be easy.
The seo guy knows your a mess online and sees growth and profit by doing the basics (site, tech seo, seo and possibly link bait) take it as a compliment he rates the product.

I have just done a similar thing but have paid for the service - on the basis we redecorate, run sales funnel, seo, link bait etc for a forecast extra £1m t/o it's costing £50k over a year so your man is offering good value.

But he won't put hundreds of items on the site - you will, he won't write the google magnet text as well as you can - you will have a lot to do as well plus as you get busier you get growing pains which may cause issue.

Ask yourself are YOU ready to strap a supercharger onto your business, that's what he is and he will expect a return equivalent to his time investment circa £40k year one less in year two (assuming he buys the magento and hosts it)

I don't know anything about your business but your site looks professional and surely you can come to an arrangement where he does work on the existing site for a fee, if you see potential in this "sampler" then go for it - if he starts now you may see uplift in September / October.

Edited by DSLiverpool on Wednesday 9th July 06:23