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It doesn't sound reasonable in return for a $2000 investment, but I don't know anything about the value of the company. It is very possible that your 5% will be worth nothing in the future. Is there anything in your written agreement that requires you to spend time in addition to your monetary investment?
Perhaps you could offer some sort of deal whereby you receive some amount of profits up to the amount of $2000, and once your original investment is recouped you agree to sell the 25% for $25 and remain a 5% owner.
right now the company is still in start-up phase so the value is low. its a clothing/adventure company so it will take time to see profits, but that is to be expected. Once it generates profits - even just to $2k- selling 25% equity for $25 makes no sense to me because then the company is starting to have value. I don't know either how to value a company so find this difficult negotiation with my partner.
Is it common to ask for an anti-dilution provision or what are the issues with that? My partner says that investors do not like to see that.
Investors will likely not accept that.
why not? Any other ways to protect my stake?
There needs to be some mechanism in place to allow you to recoup your investment
yes of course
You could refuse to sell and keep your 25% stake
If there is nothing in writing to require you to spend time working for the company
Or, you could agree to the sale on the condition that the company give you a promissory note for your $2k investment with interest
He wants to buy it though so this will lead to trouble. I need to protect my 5% though..that is my question. any protection from that or not possible?
If you are a 5% owner you are at the mercy of whatever happens with the company.
so the whole 5% is pretty much useless if he attracts a lot of other investors.
But then again so is the 25% if he attracts a bunch of investors
The botXXXXX XXXXXne is if you want to get out, the best you can probably do is try to recoup your original investment and cut ties. Hope that the 5% might be worth something in the future but don't bet on it. It's a long shot.
ok so I may have to ask for 10% just in case
Or just refuse to sell and keep your 25%. Maybe he knows something you don't know about what is around the corner.
ok and he wants me to release him of all claims.
It would be better than 5%
should I agree to a full release or also not agree on that
I'd be skeptical.
Is it possible he knows of a big order or something that might change the financials of the company?
Well, if you are not willing to cause trouble by refusing to sell for $25 are you going to be willing to sue him for something? If not, the release doesn't matter.
ok yes he is a good friend. probably not going to sue him. just wanted to know if a release makes sense if I keep a stake
it seems for people that get severance etc
My advice would be to hang on to your 30% of the company. I see no reason to sell it for such a nominal fee. If you are doing it just to avoid a problem, you might as well just view it as writing off your investment in the name of friendship - because that is what it is.
Release of claims just means you won't sue him for basically screwing you out of your percent ownership of the company
Because that is what he is doing.
(And obviously knows it)
Not trying to cause trouble between you and your friend, but you either have to accept this for what it is and realize that you are being left with nothing, or try to hang on to something and cause friendship problems. That is the botXXXXX XXXXXne here.
he does not want me to have 30% ....so thats the problem but yes if you put it like that, I will have to rethink this
Giving him what he wants preserves the friendship but it is not a wise business decision. It's up to you what is more important, but there isn't a legal solution to this problem. Only a business decision.
(or a frienship one)
Best of luck to you.