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plusalpha
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Hi all;

 

Question to the investors here.

Many of you might have done similar thing and faced the below question. :)

 

One of my friend invented a toy for kids 8-12 years age group. He made a prototype and showed us friends and family. The initial idea and presentation looks good. I think it has a market and will sell in market.

He is seeking external capital from friends and family for producing this toy on larger scale. Also work with him as an adviser  or help in marketing and getting in touch with the "speciatlity store" group for placement of this product in the store.

This is something, we are doing first time. I tried to find more information by searching on google about how to structure the "partnership" or investor/inventor deal(100% of the work done of inventor only so far). However i couldn't find much information on this kind of structure. Can you guys please direct me to any website for this topic. if you have any thoughts, inputs and  suggestion, please share.

 

Thank you :)

.

 

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Create a corporation, invest in shares of said corporation.  In most states it's very easy to file incorporation papers.

 

Companies have a build in advisor role too, Directors.  Your friend will nominate people with investor approval to be Directors who advise them on the company and business prospects.

 

With that said toys are tough.  The key to a toy is getting mass appeal.  If the toy is excellent I'd incorporate then work your butt off trying to license or sell it to a larger company.  If it's truly novel then patent it and license that.

 

 

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A family member had something similar... not a kids toy, but pretty similar. He put a value on the business and asked friends/family to invest at that valuation (as an example, if he valued it at $1M and was raising $100k, those investors would be buying 10%). Few takeaways for me:

1. Building a market for a product that doesn't exist is very challenging. This should be factored into the valuation.

2. Be clear about what the money is being used for (marketing vs inventory, etc). This is a good exercise to do up front to build the strategy, and also avoids any confusion down the road. Time spent building a strategy up front isn't wasted. The strategy will change as you learn the market, but it's important to think about how you're going to launch the product (will you focus on ecomm/facebook sales or focus on getting into toy stores... how will you do each? how much does each step cost?).

3. It's your money and you've worked hard to get it (or someone else has). Don't discount the value of your contribution.

 

My 2 cents.

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I think valuing the company without sales, which becomes really valuing the sweat equity is hard. There might be startup people who can suggest you some insights how to do it. But it might become tension between you and the inventor. Because who's to decide whether you get 10% or 5% or 25%?

 

I guess family and friends can look at it as a game and put in $X at valuation Y. But if you looked at it dispassionately and not as a family game/fun, would you really value the company at Y and would you put $X to get X/Y fraction of the company? Or would you work as an advisor/director for some fraction x/Y of the company?

 

 

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The only thing I want to say is its risky to lend/invest to friends and family. You can risk the relationship.

 

Its best to assume that the amount has been gifted to them. If it comes back great. If not then the relationship is more important than the money anyways.

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Sounds like it could be a good fit for crowdfunding - Kickstarter or Indiegogo.

 

The positive side of crowdfunding is that you insta get customers.

 

The negative side is that your product can be insta China-stolen if there's interest/traction.

 

And of course it doesn't resolve the question of splitting the company between people involved.  8)

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The only thing I want to say is its risky to lend/invest to friends and family. You can risk the relationship.

 

Its best to assume that the amount has been gifted to them. If it comes back great. If not then the relationship is more important than the money anyways.

 

Right. Similar issue with working with friends and family on startup.

 

For some people it works great. For others... not so much.

 

You have to be pretty clear of how that's likely to work with your friend/family.

 

Someone in friend's (wink wink) family is putting a lot of work on a startup run by another member of the family. For free. As in "they won't get anything for their work". And it's fine (so far). OTOH I'm probably a capitalist asshole and wouldn't be able to give tons of my work free to someone who will reap the benefit. Even if they were in family. So...  8)

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