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Inventor Financing – Investments from Reps

I have often mentioned that inventors do well to have reps invest in the company in return for ownership, and even possibly stock for the efforts in promoting your invention, either for sale by you as an independent company, or by licensing your idea.  It allows you to have the best possible partner for starting up, and the reps typically can significantly add to your chances of success. The concept is great when both parties work well together but this concept is full of pitfalls. What if the rep stops working – he or she will still own the stock and you might need to take on other partners. What if you need to sell more stock, will the reps share of the business, say 10%, stay the same? If it does, your percentage of ownership will go down.Inventor Financing – Investments from Reps

I feel the best way to proceed with early rep(s) is to follow these steps when discussing a possible invention investment. Remember these are guidelines for your discussions to see if the rep(s) are interested, you need to have a lawyer draw up the agreement once you agree to terms. The numbers used here are illustrative, feel free to adjust them to your own circumstances.

1. At the beginning, set all shares up with a value. Typically $1 or $2 is a good starting point. Also state that your company when all the paperwork is in will have 1 to 5 million shares.  Explain that most shares are not issued now, but will be available later both as a reward for “sweat equity” and for new investors.
2. State how many shares you have for the idea, start with your shares being worth at least $100,000.
3. Tell the rep he can buy up to x of the shares for the value you set on the shares – i.e. if you set the value at $1.00, and you own 100,000 shares, you might let the rep buy up to 10,000 shares.
4. Explain clearly that you will receive a certain number of additional shares each month if you work more than 20 hours on the invention – for example you will earn 3,000 shares additional per month.
5. Explain the rep can earn up to 1,000 additional shares for each month where the rep works more than 10 hours on your invention.
6. Explain that you might later need to take on additional investors. The shares purchased by the investors will probably reduce the rep’s percentage ownership in the company.  This is a key point, the rep buys 10,000 shares, not 10% ownership in the company.  The reps percentage of ownership will varying depending on the overall number of shares owned.
7. Offer the rep the right to buy shares at the same price as the next investor. Explain the number of shares the rep can buy might be limited so you can keep your ownership percentage high.
8. If the rep stops actively promoting your invention, or his or her time drops significantly, you will have the right to buy back the reps shares at the price the rep paid for them.

If you discuss these concepts with the rep at the beginning, prior to seeing an attorney, you will know if the plan works for both parties.  There is no need to spend a lot of money on attorney fees only to find out you and the rep don’t agree with the overall terms you are proposing. I’ve also found that it is wise to wait about a month before seeing an attorney once you talk about the investment arrangements with your rep. As a rule this concept will be new to the rep and often they may have second thoughts about their acceptance of the terms. If you wait, you can ask the rep after two weeks, and then again after four weeks if he or she has concerns and then you can address them before seeing the attorney.

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