To exit or not to exit
Discussion
Hi,
Feels weird asking online but I need to hear some advice from someone outside my family. So I have a early stage startup which is 100% owned by me and has been bootstrapped, we are at a stage where our device is ready to be put into production and ready to be registered with the appropriate regulatory bodies(FDA etc).
Getting to commercialisation which includes the above will take about 16 months and will cost approximately 4-500,000.
I have had on offer from a OEM to take the device off my hands today for approximately 1.5m in 3 tranches:
500k now
500k after registration
Multiplier of first year sales(anywhere between 250k and 1m).
Now, 1,5m is a s
t ton of money to me, I have been earning around 100k up till now, however I know the product and the market opportunity is worth significantly more. As an example the top 5 products in this category do about 3mil annually on Amazon(my product is similary priced and significantly superior) that does not include traditional distributor based sales channels. I have been in sales in this space for 15 years and 5m in revenue at 3 years is a very realistic goal.
Unfortunately I don't have the 500k needed to get me to commercialisation. So I have 2 options
Negotiate this offer and get as much as I can and that's it.
Get an investor on board and try and crush it with a view of exiting at ebitda multiple in 4-5 years time, but could lose this potential buyer or could fail.
What would you do?
Feels weird asking online but I need to hear some advice from someone outside my family. So I have a early stage startup which is 100% owned by me and has been bootstrapped, we are at a stage where our device is ready to be put into production and ready to be registered with the appropriate regulatory bodies(FDA etc).
Getting to commercialisation which includes the above will take about 16 months and will cost approximately 4-500,000.
I have had on offer from a OEM to take the device off my hands today for approximately 1.5m in 3 tranches:
500k now
500k after registration
Multiplier of first year sales(anywhere between 250k and 1m).
Now, 1,5m is a s
t ton of money to me, I have been earning around 100k up till now, however I know the product and the market opportunity is worth significantly more. As an example the top 5 products in this category do about 3mil annually on Amazon(my product is similary priced and significantly superior) that does not include traditional distributor based sales channels. I have been in sales in this space for 15 years and 5m in revenue at 3 years is a very realistic goal.Unfortunately I don't have the 500k needed to get me to commercialisation. So I have 2 options
Negotiate this offer and get as much as I can and that's it.
Get an investor on board and try and crush it with a view of exiting at ebitda multiple in 4-5 years time, but could lose this potential buyer or could fail.
What would you do?
SuperCarrera said:
If you turn them down, how easy would it be for them to do it themselves or find someone else? I'd worry that the biggest risk is whilst you are trying to raise funds and get this made, they beat you to the market.
I have IP on the key advantages of my device, and the average internal R&D timeline for a project like this in a company their size is 3 years.akirk said:
what is your driver:
- this project
- the satisfaction of turning idea into reality and getting it to market
do you have other ideas, and therefore get this sold and move on, or are you basically on your one commercial idea in which case you need to maximise return from this idea...?
Difficult to say, a bit of both, my actual expertise is in BizDev and Sales so would enjoy the challenge. I do have other ideas but most which require significant investment and external investors. It is rare to own 100% of a device in this industry at this stage. Hence my reluctance to part with it. But on the other hand it is a significant financial windfall for me.- this project
- the satisfaction of turning idea into reality and getting it to market
do you have other ideas, and therefore get this sold and move on, or are you basically on your one commercial idea in which case you need to maximise return from this idea...?
Would the OEM be open to being a strategic investor in your company?
They invest the 500K needed to get you to commercialisation in return for an equity stake in the business and maybe preferential commercial terms for them to sell/rebadge the device?
That way you get to see the benefits from sales revenues, they get to sell the device they want and you have lined up a potential exit partner in the process.
They invest the 500K needed to get you to commercialisation in return for an equity stake in the business and maybe preferential commercial terms for them to sell/rebadge the device?
That way you get to see the benefits from sales revenues, they get to sell the device they want and you have lined up a potential exit partner in the process.
To echo others - Take the OEM offer but try to negotiate a longer term royality to avoid feeling salty if it takes off.
There are so many variables and unforeseen hurdles that could suddenly come up that could extend the 16 months, blowout the £500k budget or a change in landscape where competitors or customers change.
Equity partners come with their own complicatiions as there is no such thing as a silent partner.
A very nice position to be in though.
There are so many variables and unforeseen hurdles that could suddenly come up that could extend the 16 months, blowout the £500k budget or a change in landscape where competitors or customers change.
Equity partners come with their own complicatiions as there is no such thing as a silent partner.
A very nice position to be in though.
I'm going to suggest thinking about it differently.
£500k isn't a lot to raise if the market opportunity is real and an investor can see a way to either a long-term revenue stream or an exit.
However, in exchange for that you'd obviously expect that your own percentage holding would reduce (not automatically a bad thing) and you'd find yourself faced with building something larger/more developed (again, not automatically a bad thing).
The challenges associated with building something bigger aren't to be taken lightly. Things change quite quickly when you move from an idea, through to developing a proper commercial operation. It isn't a case of simply adding people, you need the right people, processes, strategies, etc in order to develop things in a way that gives you either that future revenue stream or an exit at a higher valuation. Being able to tap into the experience of investors who have been there and done it can be worth more than the cheque they write.
If you're wired in the right way, it can be tremendous fun and immensely rewarding. It will also be incredibly frustrating (and doubtless stressful) at times.
Whether it's this opportunity or the next, don't let the desire to own it all prevent you from owning a smaller percentage of something potentially much bigger.
If you thought you were going to fail, would you have bootstrapped to the extent you have? I suspect the answer is probably no.
Whilst taking £1.5m off the table is always going to be tempting if it's money you've never seen before, think long and hard about what the barriers ahead of you would be for commercialising it properly and how you might (with funding) be able to address those. If you break each element down, it might help put the risk of continuing into context.
None of that is to say that turning down the offer would definitely be the right thing to do, but evaluating things objectively is likely to help.
£500k isn't a lot to raise if the market opportunity is real and an investor can see a way to either a long-term revenue stream or an exit.
However, in exchange for that you'd obviously expect that your own percentage holding would reduce (not automatically a bad thing) and you'd find yourself faced with building something larger/more developed (again, not automatically a bad thing).
The challenges associated with building something bigger aren't to be taken lightly. Things change quite quickly when you move from an idea, through to developing a proper commercial operation. It isn't a case of simply adding people, you need the right people, processes, strategies, etc in order to develop things in a way that gives you either that future revenue stream or an exit at a higher valuation. Being able to tap into the experience of investors who have been there and done it can be worth more than the cheque they write.
If you're wired in the right way, it can be tremendous fun and immensely rewarding. It will also be incredibly frustrating (and doubtless stressful) at times.
topgunkos said:
akirk said:
what is your driver:
- this project
- the satisfaction of turning idea into reality and getting it to market
do you have other ideas, and therefore get this sold and move on, or are you basically on your one commercial idea in which case you need to maximise return from this idea...?
Difficult to say, a bit of both, my actual expertise is in BizDev and Sales so would enjoy the challenge. I do have other ideas but most which require significant investment and external investors. It is rare to own 100% of a device in this industry at this stage. Hence my reluctance to part with it. But on the other hand it is a significant financial windfall for me.- this project
- the satisfaction of turning idea into reality and getting it to market
do you have other ideas, and therefore get this sold and move on, or are you basically on your one commercial idea in which case you need to maximise return from this idea...?
If you thought you were going to fail, would you have bootstrapped to the extent you have? I suspect the answer is probably no.
Whilst taking £1.5m off the table is always going to be tempting if it's money you've never seen before, think long and hard about what the barriers ahead of you would be for commercialising it properly and how you might (with funding) be able to address those. If you break each element down, it might help put the risk of continuing into context.
None of that is to say that turning down the offer would definitely be the right thing to do, but evaluating things objectively is likely to help.
You don't say what the product is, so not sure if this would be relevant, but there are various innovation grants available from the government.
Of course they're usually dependent upon the product/concept being innovative, and it helps if it will result in UK jobs/exports, and/or has any environmental benefits.
Either way, you might want to check out the Innovate website:
https://www.ukri.org/councils/innovate-uk/
Of course they're usually dependent upon the product/concept being innovative, and it helps if it will result in UK jobs/exports, and/or has any environmental benefits.
Either way, you might want to check out the Innovate website:
https://www.ukri.org/councils/innovate-uk/
Why in stages? If you are going to sell you need to load up that first payment and get it banked - try the rest on a royalty basis?
As far as I’m concerned selling up is always the best bet, it most certainly was when relief was >£1m!
You’ve been earning £100k, so seeing £65k if paye. If selling co at £1m you’ll see 900k, which is 14yrs of your current income with zero interest or investment?
Good advice on the fees, try and lumber them with this. I did a MBO in 2021 (£3.5m value) and legal fees were in excess of £60k and it was all very straight forward.
As far as I’m concerned selling up is always the best bet, it most certainly was when relief was >£1m!
You’ve been earning £100k, so seeing £65k if paye. If selling co at £1m you’ll see 900k, which is 14yrs of your current income with zero interest or investment?
Good advice on the fees, try and lumber them with this. I did a MBO in 2021 (£3.5m value) and legal fees were in excess of £60k and it was all very straight forward.
You dont say what it is, so difficult to judge, but in the current trading environment, and the way that its likely to pan out over the next 2-3 years, id say take the money and run.
You have a buyer now V no guarantee of success, and even with sucess, no guarantee of a buyer when you want to exit
Someone smarter than me may correct me, but you can only do the 10% tax on the first mil. So even if you sell in 3 years for a load more you will get hammered on tax.
You have a buyer now V no guarantee of success, and even with sucess, no guarantee of a buyer when you want to exit
Someone smarter than me may correct me, but you can only do the 10% tax on the first mil. So even if you sell in 3 years for a load more you will get hammered on tax.
monkfish1 said:
Someone smarter than me may correct me, but you can only do the 10% tax on the first mil. So even if you sell in 3 years for a load more you will get hammered on tax.
Getting hammered on tax is a bit of a daft reason to not build something larger if that’s what makes sense for the OP. Yes, relief is only available on the first £1m but this is currently a lifetime limit.
The OP’s real problem having banked ~£1.2m is what to do next. It may/may not be enough for him to retire on. If he decides he wants to give one of his other ideas a shot then he’s already used up that lifetime limit. On top of that, couple of treats, maybe a new house and all of a sudden it might feel a bit risky to invest a chunk of what’s left of that £1.2m in something new. Alternatively, if he’s the type to say “ok, clear the mortgage, nice nest egg, back to a regular job” he could significantly de-stress the rest of his life. All depends how he’s wired.
What shouldn’t be overlooked is the fact that the OP has an opportunity to cash in validates that he’s developed something others see value in.
Something that people often don’t realise is that external investment doesn’t necessarily mean continuing to bootstrap forever or never being able to take money off the table. We don’t know the possible margins but if there’s a level of emotional attachment, taking investment and developing the business so that he still has a significant equity stake and is able to earn more in a couple of years time might also be appealing. Smart investors will want to incentivise the OP beyond just the value of his equity at exit.
Bread today - jam tomorrow. Looks to me as though you have a decent smear of the jam with the bread.
As someone else mentioned, it really comes down to what's driving you.
To add to the thinking.... how old are you?
If you're in your 40s, I'd say that you've got yourself here quite a decent retirement. Or at the very least an ability to fill your life going forward with things you want to do rather than have to do.
If you're younger then there may be an argument to stick with it.
Either way, good on you for getting something to this stage. I love seeing things like this and all power to you!
As someone else mentioned, it really comes down to what's driving you.
To add to the thinking.... how old are you?
If you're in your 40s, I'd say that you've got yourself here quite a decent retirement. Or at the very least an ability to fill your life going forward with things you want to do rather than have to do.
If you're younger then there may be an argument to stick with it.
Either way, good on you for getting something to this stage. I love seeing things like this and all power to you!
Some thoughts / observations
Commercialising regulated devices (fda registration suggests this) can take a long time and cost a lot. Is this medical, consumer or what?
Any big company will be hard to commercialise with, that 3 years will probably happen with your device if not careful, they will want to use their supply chain, their QMS, their product management/ x-functional teams…. You’ll likely need to re-adjust any timelines for commercialisation with a large dose of corporate inefficiency and process, that 500k on launch is probably more in their control than yours + the royalty kicker.
It’s best IMO to only expect to receive the first 500 and treat the others as upside. If you just got the first 500 would that be OK? Could you live with that? Would 500change your life enough to make that a good deal still (looks like it would be from your post IMO).
I’d ask them what their product development process is and ask for milestone payments against more deliverables, ie if they use a 4 stage process to get to manufactured product, ask for 125k for stage 1 , 2 , 3 & 4 so you have more frequent smaller payments than one large one at the end.
Then you need ringfenced investment from them. What stops them taking you in, giving you 500k and canning the project? You need allocated budget to get the job done.
Legal costs are large on this, expect >>100k for a
Corp transaction like this - I’d ask them to finance them or demand they keep contracts very simple.
Having gone from a bootstrapped startup, completing that integration and product launches (med dev) in corporate, I’m now back in another startup, in a larger job, with more stress, because I love the hussle. Id never have the role I have now without my previous experience, so the value you get from an exit can be more than the sum of the deal.
Tbh the posters above call it right IME. It really depends on you and what you want from life, if you’re the type who’ll see the guy with the bigger yacht and be jealous, then 1.5m ain’t gonna have you flexing in Cannes, and keeping the chips on the table is probably your best best for for building >>30m Net worth, but you could end up with nothing. If you’re happy fishing with sandwiches, with a nice house and no stress, then that life is on the table for you.….
Commercialising regulated devices (fda registration suggests this) can take a long time and cost a lot. Is this medical, consumer or what?
Any big company will be hard to commercialise with, that 3 years will probably happen with your device if not careful, they will want to use their supply chain, their QMS, their product management/ x-functional teams…. You’ll likely need to re-adjust any timelines for commercialisation with a large dose of corporate inefficiency and process, that 500k on launch is probably more in their control than yours + the royalty kicker.
It’s best IMO to only expect to receive the first 500 and treat the others as upside. If you just got the first 500 would that be OK? Could you live with that? Would 500change your life enough to make that a good deal still (looks like it would be from your post IMO).
I’d ask them what their product development process is and ask for milestone payments against more deliverables, ie if they use a 4 stage process to get to manufactured product, ask for 125k for stage 1 , 2 , 3 & 4 so you have more frequent smaller payments than one large one at the end.
Then you need ringfenced investment from them. What stops them taking you in, giving you 500k and canning the project? You need allocated budget to get the job done.
Legal costs are large on this, expect >>100k for a
Corp transaction like this - I’d ask them to finance them or demand they keep contracts very simple.
Having gone from a bootstrapped startup, completing that integration and product launches (med dev) in corporate, I’m now back in another startup, in a larger job, with more stress, because I love the hussle. Id never have the role I have now without my previous experience, so the value you get from an exit can be more than the sum of the deal.
Tbh the posters above call it right IME. It really depends on you and what you want from life, if you’re the type who’ll see the guy with the bigger yacht and be jealous, then 1.5m ain’t gonna have you flexing in Cannes, and keeping the chips on the table is probably your best best for for building >>30m Net worth, but you could end up with nothing. If you’re happy fishing with sandwiches, with a nice house and no stress, then that life is on the table for you.….
Edited by stuthe on Friday 4th November 08:13
on Friday 4th November 08:13Edited by stuthe on Friday 4th November 08:15
on Friday 4th November 08:15I'll try and answer a few questions in one post.
This is a first offer.
The product is a medical device, the concerns about the internal processes of the OEM etc are valid, without going into detail, this is being circumvented.
I am 36 and not thinking about retirement, and I would be looking to use some of that money to fund future endeavours. That being said, some one asked if I would be happy with just the 500k up front, and the answer is absolutely not.
To give some context my other job since last year has been as CEO of another MedDev startup where I have just closed a seed round but where I am a minority shareholder. That experience and the understanding of the challenges are actually what makes me feel more confident I could succeed alone. I have no problem with giving up equity for investment. My comment about 100% ownership and the rarity stems from my other experience where even If I am wildly successful(9-10 figure exit) the fact I have a small percentage means what I actually get at the end of the day will be less than a small exit at a later stage here.
My ambitious side is driving me to do it alone but my head i saying, you are young, take the money and go at it again.
Good call on the legal costs and interest!
This is a first offer.
The product is a medical device, the concerns about the internal processes of the OEM etc are valid, without going into detail, this is being circumvented.
I am 36 and not thinking about retirement, and I would be looking to use some of that money to fund future endeavours. That being said, some one asked if I would be happy with just the 500k up front, and the answer is absolutely not.
To give some context my other job since last year has been as CEO of another MedDev startup where I have just closed a seed round but where I am a minority shareholder. That experience and the understanding of the challenges are actually what makes me feel more confident I could succeed alone. I have no problem with giving up equity for investment. My comment about 100% ownership and the rarity stems from my other experience where even If I am wildly successful(9-10 figure exit) the fact I have a small percentage means what I actually get at the end of the day will be less than a small exit at a later stage here.
My ambitious side is driving me to do it alone but my head i saying, you are young, take the money and go at it again.
Good call on the legal costs and interest!
Edited by topgunkos on Friday 4th November 09:11
most people who have one idea have many
mainly their issue is an inability to commercialise their ideas…
you seem to have both ideas and commercial ability, so I would be surprised if you had no other ideas…
consider selling and using the funds to bootstrap new ideas of your own, or set up a ‘fund’ to invest in other ideas, at an angel level you will get high equity for small investments and if you can help others commercialise you can make a lot of money…
having owned / run a vc backed r&d company in the safety sector, the next stages are the hardest and most likely to go wrong, I would take the money and work it
mainly their issue is an inability to commercialise their ideas…
you seem to have both ideas and commercial ability, so I would be surprised if you had no other ideas…
consider selling and using the funds to bootstrap new ideas of your own, or set up a ‘fund’ to invest in other ideas, at an angel level you will get high equity for small investments and if you can help others commercialise you can make a lot of money…
having owned / run a vc backed r&d company in the safety sector, the next stages are the hardest and most likely to go wrong, I would take the money and work it
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