2014-01-06

Co.Labs

Redditors Give You Prudent Advice On Early Seed Investors

"Someone wants to give me a $50,000 investment for the web app I'm working on. I have a ton of questions!" one Redditor implores.



So here's the scenario: Ev, a Redditor with the username whatsupraleigh, is working on a potentially awesome, yet-to-be-released web app. He has the option to acquire a $50,000 investment from two brothers, plus a great "mailing list" of many people who have expressed interest in the concept. On the eve of setting up an LLC for his web app, Ev is now struck with a dilemma: How does he move forward while maintaining majority ownership of the company?

To find out, he turned to this Reddit thread, where he outlined five money-related questions, ranging from possible caveats of an LLC, to the numbers of shares to set up, to how to run a valuation of an app. So how did it turn out?

The consensus seemed to be that Ev should form a strictly outlined operating agreement with the brothers, and not include them when he incorporates. With ownership rights at stake and no current revenue stream, most of the commenters suggested consulting a startup lawyer to address some of the inherent conflicts of interest. Ev explained that he is friends with one of the investing brothers, but that didn't assuage the thread's concerns about money--in fact, it seemed to intensify their exhortations for caution.

One option would be to have an "operating agreement that sets other rules like who gets to make what decisions," says VisualCSharp. This may prevent the partners from a conflict later down the line as the app progresses. (Ev commented that he plans to look into an operating agreement.)

Fellow Redditor the gowdru advised Ev also on how to approach the valuation of an app. While there is a general equation to determine the valuation, it can only be used if there is stable revenue, which for Ev is currently not the case. He clarifies, "if there is no revenue then it isn't an exact science more what each party 'feels' its worth aka pulling numbers out of you arse to suit you."

It seems like Ev got what he was looking for and is now steering toward hiring a lawyer, probably not setting up an LLC--at the urging of many of the advice-givers on the thread--and definitely looking into an operating agreement. Good luck, Ev! Let us know when the app is done.

[Image: Flickr user Adrian Smalley]