Commercialisation Partners and Performance...

[Hugh]

Hey Ric,

You've mentioned a couple of times that you seek people in the industry that you want to commercialise your invention in, and come up with a performance driven equity / profit share deal. 

What sort of performance drivers do you use? What have you tried that have worked, verses those that have not? 

Also, with those drivers, do you use 'carrot and stick'... my limited experience has been people love carrots, but they tend to go very cold if you talk about your own rights should they not perform. I've been stuck with 'dead wood' equity partners before, and it wasn't very pleasant.

Thanks

Hugh

[Ric Richardson]

Investors deserve their equity at the time they invest... Its just a case of keeping them to an equity position that makes sense at the time you exit ie when the thing gets sold how much of the success of the project was from funding... 90%? 10%? I find 30%-35% is a good balance... in terms of execution I find professionals who habve do the business I am going into before. For example if Im selling a business to Telstra for 15mill then I want to find a guy who has sold his business to Telstra before for 15mill...

The break up at exit in my mind should be 1/3rd idea/ founders, 1/3rd money and 1/3rd execution leader and team... with the CEO usually being 20%... and they usually get the 20% by signing up 5%, obtaining a round of funding to finance their own business plan %10 and getting to break even on market entry 5% (totalling 20%).

So at the time the business is sold the equity looks like

33% idea/ founders

20% CEO

13% Team members

33% Money

This is the best balance in my mind.

Ric

[Hugh]

Hi Ric, thanks for the advice. 

I hadn't thought about it in terms of 'how much of the success came from x" in the end state, only from 'how badly we need it now' kind of perspective. 

I didn't mean to imply that equity paid for isn't deserved. There is tremendous risk in a startup (especially one desperate for funding), so they should be compensated well for taking the leap.

To clarify the dead wood comment, (without being too specific) it was more an issue of equity being granted in exchange for specific action and performance, however that activity was not completed to the agreed standard. This left me without what I had bargained for, and as you probably know better than me, issuing equity is far easier than clawing it back. To add insult to injury, this also gave the individual a 'blocking' stake in the company, and they used it to prevent me from raising additional funding from another party (even though they were unwilling to contribute more). Basically, had me over a barrel, it was a small part of their wealth and a large part of mine, and they drove business into the ground. By the time they realised they'd done critical damage to us (scaring off friendly funds, because they didn't want to lose their control), it was too late to fix it, so in their mind it was my fault anyway. I was so annoyed with the way things worked out that I quit the start up space and swore never to return... but a few years on I'm back...I'm just not made to be a 9-5er. I've learned a lot since then, but it is still a fresh nightmare.

A friend of mine recently had a slam dunk- an innovative invention and an international corp. that said "we'll take 200, where do we sign?". It was worth about $10M to them, for several months work. They were all engineers, but hadn't worked together before. They'd split the company evenly... but couldn't agree on how to finalise the design or service the order. The dispute got so bad that the company was paralysed, and couldn't service the order. Worse, IP ownership was unclear (never assigned to the corp) so it went down with the ship. It was a total debacle, almost unbelievable. The buyer just walked away, nothing got made, nothing got sold and the company is wound up.

Do you (typically) use options or issue stock directly? Do you just issue common stock? Or do you use voting / non-voting to keep control?  

Did you just phone bash to find 'people in the industry'? Industry bodies? You've got a really wide range of inventions, you can't have had friends in all those industries :) (at least before you were famous :) :) )  

Sorry for the quadruple barrel question... this is one of my 'hot buttons'.. keeps me awake at night more then any other aspect of commercialisation.

[Ric Richardson]

Break up the questions into top line topic and I'll answer mate. It doesn't help others when answers are embedded deep under unrelated questions. R