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Is This Offer a Good One for My Company?

We’ve gotten a slew of questions like the one below.  It’s impossible to give a precise answer to “is this offer a good one for my company?” when all we have is a paragraph or two to go on.  So – like all good Aesop wanna-be’s – we’ll try to pull out one or two salient points from the parable to help make everyone wiser.  While the answers will provide some benefit, hopefully our thought process in sizing up the question will provide even more.

Question: I’m working on AJAXifying and otherwise adding “web 2.0″ functionality to my site, but there’s a lot of work to do and I am no software engineer.  Suddenly I’m drowning in competitors, but still maintaining a solid number two position in the market, from publicly available data (which is sparse).  I haven’t gone out looking for investors, but they often come to me. The most recent offer is with a new company working on the “incubator” model. They want 75% of my business in exchange for putting their full-time programmer and their full-time accountant onto my project for three months. I have not seen the resumes of these people. They will also pay me a salary which is about equal to my current net revenue. I am inclined to turn this offer down. Is this wise?

Answer: Unless you want to sell your company and move on, it would be very wise to turn this offer down.  First of all, the offer sounds more like the “incubator” is buying your company – with you retaining 25% of the equity and getting a salary equal to your current revenue.  The effective value you are getting for the three months of full-time programmer and accountant is – at best $50k (1/2 of a full time equivalent).  Is this – plus the revenue you are getting from your business (and it’s unclear whether they are giving you this for 3 months, a year, or the rest of your life) – worth giving up 75% of it?  While only you can answer this, it seems like a very fishy deal. 

January 8th, 2007 by     Categories: Acquisitions    
  • http://chrisyeh.blogspot.com Chris Yeh

    As a side note, this incubator deal is a loser for the incubator as well–any entrepreneur who believes so little in his business as to give away 75% of it for 6 man-months of consulting is unlikely to build a valuable company.
    It doesn’t make much sense to adopt a self-defeating business model!

  • http://leighhimel.blogspot.com Leigh

    Here’s my 2 cents of advice for what it’s worth. Not knowing what your biz is and how much time you have left in the week to breath. My advice. Go and offer up your Ajax services to the nearest digital ad agency. You have a valuable asset and it’s you – especially in a resource scarce HR market. Once freelancing go and make friends with a programmer who probably hates the ad game and really wants to run a Web business. Get him/her to do freelance too. This way, you make some money so your not worried about eating, you get a programmer and a business partner all the while keeping 100% of your business.