Great topic Mark. I was co-founder and CEO of a website called twotoads.com a Web site that filtered profanity and sexually explicit content out of email messages for kids. My partner Jeremy and myself were able to get the site started on a very basic level, but needed capital to take it to the next level. So, we sold equity shares in the company. We were able to raise over $250,000 which cost us 49% of the company.
The company ran successfully for 5 years until the government enacted the COPA (children’s online protection act)law. That law stated the we now had to get a signed permission waiver from every kid’s parents that signed up for our free service. We were making our money from advertising, so all we required was the kid to make up a user name and password and they had a filtered email account. The kid could live next door to us and we would not have known it. Now, we were going to have to get their exact address and name. Which to me defeated the purpose of protecting the child. The cost of getting this information and storing it was cost prohibited and caused us to shutdown.
One interesting side story to this is PR. I was able to generate plenty of media buzz because my partner was a 17 year old computer whiz. If I called any media source and said my partner and I started a website to protect children online they were not interested until I said the president of our company is 17. Here is a link to one of the stories they ran. As you can see I get mentioned, but he is the focus of the article. Which was fine with me becuase it helped get the interest we needed and the funding.
http://www.fastcompany.com/articles/career/careerbuild/power_mcgee.html

Our office was in columbia, SC. As a promotional idea I went to the mayor of the city and offered to provide a website that anyone could use and get filtered email for free. It would have the @columbia.sc tag on each email promoting the city. He loved the idea and did a news conference touting how the city government was looking out for its citizens by providing this free service. It went over very well and we had thousands sign up for the service. If you go to http://www.columbia.sc/ I believe it is still available today for those that already have an account. I am not sure about new signups. The company we sold a portion of the company to keeps that website active. Here is the logo we used for our company at the time.

This same principle applies to licensing. Basically you are giving up 95% of your idea to get a company to invest their money and other resources to bring it to market. If you are looking at bringing in investors to help you make your product you have to be careful how much of the product/company you are signing away because you can start out the majority owner and end up the minority holder and have no control at all in what happens with your product/company.

http://www.rogebrown.net

My group and I are leaning toward the shared equity method of bringing our products to market. I would absolutely give up part of my product in order to see it hit shelves. The alternative is to not have it on shelves at all.

The share equity method makes more sense to me now than trying to cold call for licensing deals. It’s damn near impossible and if it weren’t, then everyone would be landing one at this point.

Share equity seems like you have more control even though you are giving parts of your ownership away. Everybody wants to make money and if they have the potential to make money with your product, they are now not working for you, they’re working for themselves.

Think about what I just said. They are now working for themselves and the fact that there are multiple hands in the pot make it so that you are not depending on solely on a licesning agent to use their contacts and land you a deal, you are depending on multiple sales reps which increases your chances of landing a deal.

How much would I give away? Probably alot with my first deal just to break the seal and land the first deal. The cost of that happening is worth it’s weight in gold.

Compliments to you Mr. Brown. When I see someone that is creative in inventions and other ideas like your website business you stated that means you have creative genius. There are said to be four types of genius.

Now don’t start a party for yourself, I didn’t call you a genius…but you have the traits of one. Very impressive when someone can create winners across the board in different fields…if it’s for good reasons…

I don’t know if you formed that website to retrieve a pile of porno for yourself…or to learn the cool new curse words the kids are using…that you have to clear up.

Don’t start the party, but I have already sent out the invitations! LOL

Are those four types you are referring to the Idea Genius,Plan Genius, People Genius, or Data Genius? I would add a fifth called “Lucky Butt”
I think I would fall more in that realm. LOL

As for why I started the site it was because my kids were getting all sorts of nasty emails and i didn’t like what was on the market to protect against it. We had over 9000 variations of cuss words and growing when we shut down. Kids are very creative when trying to outfigure a filter. I liked the challenge of keeping ahead of them.

Mark…I think you are talking about what I have heard as “Sweat Equity”, meaning like if one person was to offer to do marketing without pay for the invention in exchange for future equity.

I don’t like these deals because in the very beginning an idea is not worth much at all so someone can put a little bit of effort in and expect too much back.

Share equity can be too expensive…like a patent attorney wanting half when the sales come in. His input was worth 5 to 10 G’s…is it fair he then gets half of a million or more in return?

I had this with Handi-Straps with angel investors. Many wanted to put in money but they wanted 50% for $100,000 to $250,000 investment. I had offers for more….but I decided to hold onto myself.

I thought in a year $100,000 would be small money to me as I expected big sales so I did all myself. I didn’t count on launching in the officially labeled worst economic year since the Great Depression. That will give your dreams a kick in the head.

Ron Komorowski
Inventor of Handi-Straps
www.handi-straps.com

Well….it’s like this….

In Share Equity deals you try not to give away more than 49 points. Keeping you in control…if you can avoid that you had better have a good relationship with a voting block larger than 50 points….that’s just good business

Roger is 100% correct….in a sense licensing is a Share Equity deal where you give away 95% and control..without a voting block alliance

In Rogers case that’s fine, because his business model is called “Mailbox Money” that is, if you structure enough of these smaller deals you can build a substantial amount of annuity revenue for yourself without being involved in the actual business structure. This requires you to keep feeding the machine with new license deals understanding they each have a life cycle. It’s a good model, but I’m sure as Roger can tell you its far more work than it sounds like.

The main thing to understand about Share Equity deals is the share partners are investing in YOU…every bit as much as the product itself.

As for the equity itself, you can easily get everything done in 49 points….in my deals the money guy gets the largest shares and that tops out at 20 points over 5 years.

If you go to a straight investor who has no active roll in your group you could easily pay 40 points for 250K

I think it’s a great way to work.

I will always give away up to 49% on every project.
I come up with ideas, that may need a little tweeking to perfect.I’m no graphic artist, and I want it to look it’s best.

I think everyone in the project is valuable and I want them to be paid like they are.

I am completely happy with 51% of the money.

Mark…angel investors want 50%. Not 49% for a reason. Sometimes they ask for controlling interest like a venture capitalist which can be 70%

It would be tough to get an angel investor on the professional side in for less than 50% and I found them VERY difficult to deal with, met many. They look down at the guy with just an idea and think they are above because they have the money.

An “angel investor” can be the guy that owns the pizza store or your uncle…but I’m talking the ones that invest over and over as that is their line of business.

I used to attend angel investor gatherings/meetings. In NJ we are lucky. Access to everything.

I don’t know Mark…I think you have too much talent to need those partners…file a provisional or a patent app…you can write yourself probably even…and go at it yourself.

What could these partners contribute? $10,000 worth? Suppose you have a big idea worth a million or two. Isn’t it better to go at it yourself?

Not saying you, but many here dodge filing a patent application. You just have to take the plunge and invest in a patent. My guy charges $3500…there are cheap patent agents out there.

I say file the patent and get to it….make your calls. No excuses.

Mark,

How do you deal with the tax ramifications? I wanted to sell shares in my prosthetic device to raise money and was told that in order to maintain 51% I need to supply 51% of the money. If I try to value the idea as 51% I would need to pay taxes as if I had personal income of that.

Mark, that’s not the case, at all…

Simply set up a quick LLC in your state and you then have 100 points to work with. In an LLC the profit/loss is passed directly through to the members via a schedule K on your tax return….As partners (and certainly as the controlling partner – in LLC’s they are called members) you decide how those 100 points are split.

You can own 95/100 shares and do absolutely nothing…as long as the guy with the other 5 shares doesn’t care…..it has nothing to do with contribution, …money, time, or effort.

Profit and/or tax liability are based on the value of the member shares.

Ron,

I don’t think you understand – Share Equity is a business model, not an inventing method.

3 different approaches ……that’s all.

I appreciate the advice, but I have 4 major utility patents in the mill and 3 more being written – never paid a penny.

As for investors….you are talking about two different things here – one is an investor in a business – that’s a VC or Angel investor who will always try and get control, and the other is a Share Equity investor who provided one of the several things needed to develop a product – that person will never get control. Mainly because although what they bring to the table is valuable – it’s never going to be of a value more than about 20 points.

Well

how about you all do this.

give me 1% of your gross. if each person does that then i`n a few years i`d be where i am if i sell one idea.
and you`ll never miss that 1% lol.
and i`ll even give you a pic of me to hang in your office.

Ya….not guna happen chief…sorry LOL

bingo!

I couldn’t help myself :-)

Haha! Good one Tania :)

Mark

come on . its better that i`m honest up front with you than some of these companies out there who want more and give you less. hey `im given you a picture.lol

Tania bingo ? lol

Mark is dying to say bingo with the G 7 etc as calling out bingo numbers…I had to beat him to it Robert. Made absolutely no sense on this thread…but I’m just that way sometimes :-)

Tania

yea i knew he was wanting to say it.. it was cute the way you threw it in there. lol

I would be willing to part with 49% or points, it’ a lot more than 0:) and it’s a place to start.
What would be the smartest way to come up with these investors if you don’t personally have all the connections in your address book?

You can look up angel investors here.
http://www.gaebler.com/angel-investor-networks.htm I have not used them or endorse them. I just know this is a resource you can use.

roger, you are a wealth of information. just looked them up but, will file that in case i ever need significant funding.

“What would be the smartest way to come up with these investors if you don’t personally have all the connections in your address book?”

Get a new address book Amber….Jist Kidding.

Some of them are easy – you can always find a graphics person who will work on Share Equity….some prototype people will do it, and some patent lawyers as well…..

They are there, you just have to convince them you know what you are doing, and having a GREAT invention helps too.