Is Giving Equity The Answer?

Most inventors don’t have cash after they have paid out their savings to patent attorneys or design engineers.

They look for ways of engaging other professionals for the help they need. It makes sense that they should explore non-cash options. The problem is, that most professional service firms1 do not want a share in your enterprise because:

- ?????? ??????????: if you are talking to them, it means you haven't got started – no genuine value yet.

- ???????????????? ?????????? ??????????: nobody wants to be a passenger in a Ferrari. The driver has all the fun. They can’t stop you from making stupid decisions or from selling another piece to somebody unsavory – they are now in bed with sleazy partners…..

- ??????????????????????: I get offered equity for services at least 3-5 times a week – usually 2-3 weeks before significant patent payments are due. At least 50% (on probability) are better than yours).

- ??????????: Being offered a minority shareholding, they can’t hope to control the risks. Clearly you are a novice and every time you hit a roadblock, the minority investor will have to steer the project past it. In most cases, it will cost hard cash.

- ????-?????????? ????????????????: As a shareholder, they have to contribute to any placements or they will suffer dilution. Now the “opportunity” is costing them not delivering anything.

- ???? ??????????????: Having a minority shareholding means they have no input or control, beyond their professional contribution. They have no idea when they can cash out.?

I recently had a client conversation (coaching call) with an inventor couple who were calling me for our regular chats, from a holiday island – Their issue was that they had offered a design engineer 51% of their project in two tranches, to complete a prototype for them. The guy had agreed and had provided them with an offset invoice totalling $400,000 (at least 5 times the true value).

They reached a point where the mechanical side of this device was working and they now needed to appoint an electrical or electronics engineer to design the control box. All of a sudden, the mechanical designer disappeared and refused to communicate. The project had stalled.

The mechanical designer was due to receive 30% for a particular milestone and a further 21% for the completion of the mechanical works. The problem was that this company was properly funded and control of the project would transfer to this designer, who could wind up the operation and keep the cash, against his $400,000 invoice. He could then afford to purchase the patent from the company for peanuts and he would have everything.

The inventors were keen to keep the project moving and also to keep the designer happy. One of the options they tabled was to provide him the full 51% up front, so he would remain motivated. With no communication or signatures on agreements, they were slowly strangling their project while this designer had no time constraints or risks.

Within 10 minutes we had their problem sorted.??

We agreed to send him 2 registered letters (7 days apart) explaining they would stick to their original agreement. They presented that the first phase was almost done and they would issue the 30% equity in consideration (thereby eliminating any prospective debt).

They then sought the electronics engineer and agreed to pay him for his services. They ideal guy was looking at a cost of less than $15,000 for the design and production of a prototype for them. They elected to pay him in cash.

They could then have somebody else complete the final mechanical design and prototyping, so that they would not be beholden to the first equity offer, which was still not accepted in writing.

They could thereby keep their project moving, have most of the mechanical engineering completed for 30% of the project and the balance done for cash, from another engineer.

This ensured they still controlled their project, the mechanical engineer who had 30% of the project would be more than adequately compensated for his efforts and the Company still maintained all of the patent rights associated with the innovation. They were also not being slowed down by third parties, which is critical with any intellectual property.

If you are experiencing these issues with your current project(s) get in touch with any of the links below.

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