He likes the project.
"We would have to utilize a Regulation D 504 Private Placement offering in order to raise $150,000,"
A Reg D 504 private placement is just an private equity offering that doesn't require registration with the SEC. It's for raising small amounts of cash (less than $1M). Exact requirements depend on the state you live in.
"equity given out would be 20% to investors, leaving 80% for the owners,"
He would sell 20% of the company for $150K, thus valuing the "owners" share at $600K.
" with a five year exit strategy in place"
Hmmm...I would want to know what this is about as this is a key piece of info. It means he wants his money in 5 years and has some plan that he is proposing to you to get it. This can be a stock buyback, IPO, reverse merger or probably 10 other things I don't know.
"For exit valuation, it will be based on the sales based valuation of your company at exit."
I guess he wants you to pay him in 5 years based on the sales of your business. Sales-based valuations are normally used for businesses in which the main product is service expertise like an accounting firm or hair salon.
"Calculated sales based valuation can be determined via any CPA, generally the multiple of 2 is utilized when computing the sales based valuation"
Silly. Sales based valuations are back of the napkin calculations and they vary by industry and particular company.
It;s obviously hard to know what is going on in this proposal by reading only snippets. It's clear that they want you to pay them money in 5 years based on valuing the company at 2x sales. The first question I would start with is are your sales now $375K/year?
Send me the contract redacted if you want and I will tell you what the key issues are.
Hi everyone,
This is in regard of a business that i'm trying to set up and i have a potential investor...next paragraphs are part of his draft agreement and email and i dont want to sign it before I fully understand the whole contract.
"I have had a chance to analyze the project, the numbers look terrific, great profit margins and thus the return on investment would definitely be high enough for us to take on this project successfully.
We would have to utilize a Regulation D 504 Private Placement offering in order to raise $150,000, equity given out would be 20% to investors, leaving 80% for the owners, with a five year exit strategy in place".
"For exit valuation, it will be based on the sales based valuation of your company at exit. Calculated sales based valuation can be determined via any CPA, generally the multiple of 2 is utilized when computing the sales based valuation"
Can someone explain this to me. I dont think I fully understand it.
Thank you in advance.
