Share this content

Unusual situation

A client is looking for investment of £300k for a 10% stake

Didn't find your answer?

An inventor client is looking for investment of £300k for a 10% stake in their company.  The company is loss making, but has a patent-pending product that has potential, but investment is required in order to make this happen.

Shareholding at present is

51% Mr A (510 x 1p shares)

47% Miss B (470 x 1p shares)

2% Mr C (2 x 1p shares)

Miss B is the divorcee of Mr C and has put a lot of time into the business previously.  She wants to sell her shares and is happy to sell for £30k.

Client wants part of the 300k outside investment to be used to buy back the shares from Miss B.

My opinion is that an outside investor unlikely to agree to this for several reasons; not least, why would an investor pay 300k for a 10% stake when an existing shareholder is willing to give up 47% for £30k?  I also wouldn't imagine an investor would be happy to see part of their investment used to buy out existing shareholders.

Before I go back and oppine that the client probably needs to rethink this, I wanted to confirm that it's not just me who thinks this is odd?

Replies (22)

Please login or register to join the discussion.

By Duggimon
09th Mar 2021 15:28

If he needs investment in the company, and is seeking to part with equity in order to achieve this, then the shares need to be created, not sold from an existing investor.

If the incoming investor buys existing shares, Miss B will be £300K up and the company gets nothing. He should either buy the shares from Miss B himself or have the company buy them back, then have new shares issued if he's able to find an investor willing to agree his idea is worth £3m.

On that subject, I would also point out to your client that a guess at potential future value is not a basis on which to make an investment today, he'll be unlikely to get £300K for 10% of a company unless it's worth at least £3m, probably more.

Potential is just potential, not value. Potential always has the potential to be potentially nothing.

Thanks (0)
RLI
By lionofludesch
09th Mar 2021 15:34

It'd have to be a very good prospect for me to part with £300,000 for a speculative investment.

Especially if I could buy a 47% holding for 10% of that.

Your inventor client hasn't financed much, has he ? 51p is derisory when you're asking for someone else to come up with £300,000.

Thanks (0)
avatar
By Paul Crowley
09th Mar 2021 15:41

Give client a link to just about any Dragon's Den episode
What is the current value of the company? is it really £3M?
Would he really want an investor that is not able to determine the true value of a company

He would he be better of with Sugar's £250,000 is my guess

Thanks (0)
avatar
By johnt27
09th Mar 2021 15:43

Agree with you that it seems unreasonable. If client has a problem with your oppined response suggest you point them towards the Dragons Den back catalogue for a sharp dose of reality regarding speculative equity investment.

Assume you have pursued R&D tax credits, possible grant support or some of the government back equity funds where relevant?

Thanks (0)
Replying to johnt27:
avatar
By Manchester_man
10th Mar 2021 05:34

Yes, they have already obtained and spent one innovation grant and are constantly applying for more. You name it, they’ve applied!

Thanks (0)
avatar
By Paul Crowley
09th Mar 2021 15:43

Who owns the possibility of the patent?
Person or company?

Thanks (0)
Replying to Paul Crowley:
avatar
By Tax Dragon
09th Mar 2021 15:48

Deborah Meaden question?

Thanks (0)
Replying to Tax Dragon:
avatar
By Paul Crowley
09th Mar 2021 18:04

Yes once I had the Den in mind I started thinking along their regular questions and it is Debbie (SCOWL) sorry Deborah who fixates on whether the patent actually exists.

Thanks (0)
Replying to Paul Crowley:
avatar
By Manchester_man
10th Mar 2021 05:37

The company. It has certainly opened my eyes to the cost of patent applications! £50k so far, including legal costs, over a number of years, and still patent-pending!

Thanks (2)
Replying to Manchester_man:
Routemaster image
By tom123
10th Mar 2021 10:28

And that is before you get to the concept of actually pursuing a breach.

IMHO most nimble businesses should put that £50k to work in getting sales out quick and stealing a march on competition, rather than enriching lawyers.

Thanks (1)
avatar
By SXGuy
09th Mar 2021 15:56

Tell Miss B ill give her £4.70

Thanks (0)
Replying to SXGuy:
A Putey FACA
By Arthur Putey
09th Mar 2021 18:18

... but I want 40% of the company

Thanks (1)
avatar
By Manchester_man
10th Mar 2021 05:31

Haha, thanks to everybody who has responded. This is a client who I have had now for over 8 years and they have been pedalling this idea for many years previous to that.

They are absolutely 100% convinced that the invention is ‘world changing’ and have devoted their lives to this, spending eye watering amounts over the years, on things like patent applications, legal costs, investment advisers, product testing, pitch presentation training etc.

Everybody who looks at their pitch comes to exactly the same conclusion, which is that the product “might” have been ok 20+ years ago, but the problem it claims to solve just isn’t a problem anymore.

They refuse to give up and are even more determined each time they suffer failure.

They have turnover projections running into tens of millions and their valuation is staggering, considering the company is carrying huge losses funded by directors loan injections.

They are nice people, but won’t listen to advice if it doesn’t fit with what they want to hear.

I don’t really get involved anymore, beyond preparing accounts and answering the occasional email such as this latest query.

I’ve tried the dragons den approach with them previously, but they believe they are on a different level and rebut any criticism of their valuation because “it is very conservative” and an investment adviser has ‘okayed it’.

I did succeed in deterring them from taking out a bounce back loan!

Thanks (0)
Replying to Manchester_man:
Melchett
By thestudyman
10th Mar 2021 08:14

They sound clueless. I've once worked with an entrepreneur who had amazing forecasts for his £2m revenue, loss making business was suddenly going to become profitable after 10 years. It was hemorrhaging cash and the only investment they could find was debt investment. A similar situation- they were not willing to give way control of his company.

In a private company, why would anyone making a significant investment only want to invest 10%. Especially when they see the majority shareholder has put in a pittance. Again similar to my experience, the entrepreneur had only invested 100 £1 shares.

Would advise you continue preparing accounts and refuse to be drawn into their delusional world.

Thanks (0)
Replying to Manchester_man:
avatar
By paul.benny
10th Mar 2021 11:47

I'm curious now. If you don't think it's a breach of client confidentiality, what is this product?

Thanks (0)
avatar
By Tax Dragon
10th Mar 2021 06:54

Don't ask don't get - so you don't want to stop them talking to potential investors, cos they'll blame you that they then don't get an investment. You're in a slightly tricky situation, possibly. You say they have sought investment before though and not succeeded. Have they asked themselves why not (beyond the obvious points above about daft valuations... and tbh in your shoes I would I think steer clear of discussing values, you already done that, that's now a point for the would-be investor to raise)?

Sounds like they haven't understood what an investor would expect. Sounds like they're offering 111* 1p shares. An investor might, I suggest, want a different share type. They might not want (I agree with you) £30k to go straight back to one of the shareholders and potentially the other £270k being used to repay loans from the (other? all?) shareholders. They might want priority repayment. They might want a larger share of the company until such time as they get their money back.

*What are they offering? 111 is obviously 10% of 1111, but once 470 of those are bought back, 111 is of course 17 or 18%. Have they thought sensibly about this proposal at all?!

Thanks (1)
Replying to Tax Dragon:
avatar
By Manchester_man
11th Mar 2021 09:50

I agree with everything you say. It’s good to see that my feelings are echoed, as they are quite convinced that this is quite a normal proposition (Miss B selling her stake for 30k as part of the overall investment).

In answer to “have they asked themselves why not” - they believe wholeheartedly that the only reason investment hasn’t been forthcoming is because potential investors have not fully understood the business and/or the potential of the product. On occasion it’s been because the investor hasn’t been experienced in their industry.

Thanks (0)
Replying to Manchester_man:
Melchett
By thestudyman
11th Mar 2021 12:58

Manchester_man wrote:

I agree with everything you say. It’s good to see that my feelings are echoed, as they are quite convinced that this is quite a normal proposition (Miss B selling her stake for 30k as part of the overall investment).

In answer to “have they asked themselves why not” - they believe wholeheartedly that the only reason investment hasn’t been forthcoming is because potential investors have not fully understood the business and/or the potential of the product. On occasion it’s been because the investor hasn’t been experienced in their industry.

I can think of two scenarios here:

1) There is no demand for the product and the potential investors have politely declined to hear further.

2) If we follow what the client is saying, there is a viable product however investors consistently do not understand what and why. In that case, they need to work on their communication skills or presentation, because it seems to keep "happening".

I would guess scenario 1 is what has truly happened.

Thanks (1)
Replying to thestudyman:
RLI
By lionofludesch
11th Mar 2021 15:56

thestudyman wrote:

In answer to “have they asked themselves why not” - they believe wholeheartedly that the only reason investment hasn’t been forthcoming is because potential investors have not fully understood the business and/or the potential of the product.

Or - maybe the current owners haven't understood the business.

Who knows ?

Thanks (0)
avatar
By paulwakefield1
10th Mar 2021 08:09

Be careful not to trespass into regulated investment business territory (unless you are regulated of course!!). This sounds as if you are getting very close.

Thanks (0)
avatar
By bernard michael
10th Mar 2021 10:19

The inventor needs to resolve the problems stopping a patent being granted. Also for what countries has he filed the patent ?? If it's restricted he will have find an idiot who's won the Euro lottery and doesn't know the value of money

Thanks (0)
Replying to bernard michael:
RLI
By lionofludesch
10th Mar 2021 10:36

bernard michael wrote:

The inventor needs to resolve the problems stopping a patent being granted. Also for what countries has he filed the patent ?? If it's restricted he will have find an idiot who's won the Euro lottery and doesn't know the value of money

He'll need one of those anyway.

Maybe two.

My advice would be to put these comments in writing, just so he can't say you didn't warn him, and let him crack on with his search.

Thanks (0)
Share this content