To Incorporate or Not?

[Dustin]

Hi!

Newbie here (in every sense). Hope this is the right place to post questions.

I have a small site that gets a lot of traffic. This has garnered the attention of a manufacturing company who would like to use this site to increase revenues for both of us.

I have no tangible assets, so to speak, other than the site and traffic it brings in. They are willing to foot the bill for marketing, advertising, new site layout to accomodate E-Commerce, etc. They want to split the equity and revenue profits 80/20 in their favor.

They also want to "incorporate the site", adding the "Inc" to the current name.

I am told I would be the major shareholder.

I have other questions, but I guess the first ones would be:

1: How does the term "incorporated" affect me - if at all? How does it appear to other commercial sites? Does it make my company look weak? Strong? Indifferent?

2: This is a company who nets just over $800K a year. They have the means, knowledge, etc to enhance revenues on my site. However, I wonder if 80/20 is fair?

Anyone with experience in this area who could share any input would be great!

Paula

Paula,

I'm no lawyer, so you can take this with a grain of salt ... or a big spoonful ... your choice. I have, OTOH, been in business a while.

First, let me say that the offer seems to indicate that you are doing a lot of things right. For a co. with an annual net of $800K to even look at you is encouraging. (I should be so lucky.)

Second, incorporation means a lot of changes in the way you probably do things. While it protects (presumably) everyone involved, you have to really look at how the articles of incorporation are set up. Who gets what, who does what, who is responsible for what, who is really in charge, etc. You could be giving your company/site/business to people that might use you and discard you. GET A LAWYER!

Third, Inc at the end of your co. name makes a statement. Several, in fact. Generally speaking, it implies stability. It says you are dependable. It says you've been around for a while and most likely will be around for a while longer. It says you can be trusted. (Well, it says that to me anyway.)

Fourth, the 80/20 seems a bit lop-sided. OTOH, they are footing the bill for all updates/upgrades and you stand to take 20% of $800K. Unless I'm still half asleep, that's $160,000. Is it worth it to you? The hell with what they think. They're going to take care of themselves. As it should be. You take care of you. GET A LAWYER!

Good luck ... whichever way you go. GET A LAWYER!

[Dustin]

Thanks!

Old Sarge? Retired Military?

I do plan on getting a lawyer but wanted to do as much research as I can on some of the terms I'm not familiar with - uh, like all of them?

[ntarifi dubai]

Keep something else in mind too -

They may say you will be the majority stakeholder of your business once it is incorporated but there are different types of stock. If they issue you common stock for 80% of the company and no voting stock and issue themselves 20% of the stock and make it voting stock they have 100% control of your company.

If you are going to remain in control you need voting stock - and at least 51% of it.

[Dustin]

Thanks Bill,

This was another area I was doing research on but didn't understand. I don't expect to understand much before we go forward, but things like this that I can get in writing will at least protect me until I am able to understand it better.

Is there another name for both common and voting stock? Something like preferred stock?

Originally Posted by ginc

Old Sarge? Retired Military?

Yep. 21 years active duty. 15 in business since retirement.

[Dustin]

Same here. Army. 20 years. But not yet in business

[Dustin]

Originally Posted by The Old Sarge

Fourth, the 80/20 seems a bit lop-sided. OTOH, they are footing the bill for all updates/upgrades and you stand to take 20% of $800K. Unless I'm still half asleep, that's $160,000. Is it worth it to you? The hell with what they think. They're going to take care of themselves. As it should be. You take care of you. GET A LAWYER!

I meant to add that $800K is what the company gets. I would only make 20% of the revenues that our new "merger" would make with my site being a totally separate - but incorporated company.

Nothing is in writing yet so I have a little room to negotiate. They an equity split of 80:20 and a corresponding profit split. This is something I need to ask and understand. I'm not certain what they mean by equity and I guess this may have something to do with shareholders and voting power?

Originally Posted by ginc

I meant to add that $800K is what the company gets. I would only make 20% of the revenues that our new "merger" would make with my site being a totally separate - but incorporated company.

I should have realized that before I responded.

Nothing is in writing yet so I have a little room to negotiate. They an equity split of 80:20 and a corresponding profit split. This is something I need to ask and understand. I'm not certain what they mean by equity and I guess this may have something to do with shareholders and voting power?

I suspect you're right about the "equity". As for the 80/20 on your site alone, I definitly think it's too small. The site is already yours and they just want to "buy in." I would start at no less than 50/50 and see where they go.

And at the risjk of redundance, GET A LAWYER! lol

I used to think saving money by NOT getting a lawyer was smart. Several years ago I learned that a good lawyer is invaluable. Especially when their advice is sound and their fees are reasonable. I'm fortunate enough to have one that is never greedy and charges only when he has to "do" something for me. His advice is always free ... as long as I don't take up too much of his time.

Find a good one.

Good luck and I hope this pans out and pays off for you.

[Dustin]

I suspect you're right about the "equity". As for the 80/20 on your site alone, I definitly think it's too small. The site is already yours and they just want to "buy in." I would start at no less than 50/50 and see where they go.

Ok. So say I get 20% of the profits. How do I tell them that I want 25% of profits to go to no one - but to stay in the company to increase value of the company? Is there a way to word this? A name for this?

This way, if I ask for 25% (they wouldn't go for 50%), I will know that a quarter will always remain in reserves.

And yes, I'm getting a lawyer :-)