How much is an idea worth?

So I met this guy – let's call him Mr. G – and he has this cool idea for a new energy beverage. While the idea is cool, what's even cooler is the market for energy drinks is red hot and this idea allows you to position yourself unlike all the other brands out there – you get to outflank the completion. Now Mr. G is a college student and has done some work on the idea. He has hired a chemist to create the formulation (about $400 total cost; the drink is simple to make), conducted a survey with 100 college kids about the idea, came up with a couple of good names, and written a business plan for a business class. I met Mr. G while speaking to his class. He approached me a few days later asking for some advice on his idea – lots of kids do so it was nothing new. I liked the idea for the reasons above and explored his desire and ability to turn this into a real business. Mr. G would love to start this company and become an entrepreneur. Unfortunately, Mr. G has promised to help an uncle for a while after graduation and he won't really have the time to commit to another business. I thought that was a shame. So I asked him if he'd mind if I ran with it for a while – at worst he'd get some exposure on how to filter an idea at best maybe we'd start a company and he'd get some equity for his idea.

It turns out that we felt we needed to test the concept to make sure the market will accept the product – good idea before you really launch a business (if you can, sometimes you can't). For this idea, it was pretty easy to test the market. The product name is tentatively called FLIGHT, and the energy drink is a mix – one shot to a cocktail and you get all the boost of a multivitamin and a cup of espresso – no taste, zero calories. In order to do that we had to a bunch of stuff: create a company, create a bank account and put some cash into the company, finalize the formula for consumption and stability, create a logo, set up a landing page, get some bar/club owners to let us come in and test the product, start the trademark process, make some samples and get some "talent" to promote the product in the bars. Now I took on these actions while Mr. G was focused on graduating from college. We'd exchange emails, but I took the lead since it was obvious that if this was going to go anywhere, it would require someone to run the business. On top of that, Mr. G was planning a one-month vacation to Brazil departing on June 4^th. Everything was hunky dory until I decided we needed to take care of some legal stuff – namely the corporation we formed needed to own the idea, which meant Mr. G needed to assign his interests to the company.

Now in the past I've been trying to mentor this young fellow on various items and I told him that he could get somewhere between 5% and 10% of the company and then dilute if we finance. I also said that if he could be a small owner in a big idea while others are trying to build a business, he could learn quite a bit while potentially make a few bucks. He was concerned with ownership after we finance. I said that he would be diluted accordingly but in reality a commitment on ownership post financing would be best (since this deal goes no where without funding) and he could expect a small amount (never talked about percentages).

So things are moving fast – I lined up two trials in local Denver clubs for June 7^th and 8^th. I also did all the other stuff above (spent about $4K). On June 3^rd we got our legal stuff together and emailed the docs to Mr. G. He called on the evening of June 3^rd and said he'd like to get on the phone with his uncle (an attorney) – his uncle was unavailable at the time. On June 4^th he shows up at my office and is wishy washy on the deal. He asks if he should delay his trip – I said it's up to him but we can handle it without his presence. He decides to leave. We have 90 minutes to get him to sign the stuff. If he doesn't sign, we get into an awkward position where the idea is jointly owned and it makes it hard to do much going forward. Time is ticking, he's got questions, we provide answers and eventually get to the deal where we would offer him 1% of the company post fundraising(if we decide to go forward), give him or his family the opportunity to invest, and promise to assign all rights back to him if we don't fund the company in 8 months. I feel like this is a smoking deal – there is no risk for him. The clock is ticking and he freezes. He doesn't know what to ask for, he doesn't know what is fair, he hasn't done any research and his plane is leaving in a few hours. The only thing he mumbles is "What about 5% to 10%?" Words were exchanged (not all that pretty) and he leaves.

Now I've got ten folks lined up to do this trial – cases of this stuff, stickers, and buttons and all kinds of shit and this cloud surrounding the idea. We do the trial because the missiles were already launched – it was a success (there are issues but addressable) – and now we are frozen. It would be stupid to start a company with this sort of ambiguity around the ownership of the idea. So now, we wait. Meanwhile I am losing interest in the concept, continually finding flaws with the idea and by the time Mr. G comes around there is a good chance I'll have moved on to something else.

Ideas aren't worth much. Simple once are worth even less. If you have real IP (software, patents, trademarks, distribution, etc…) – which this doesn't – maybe it's worth a couple of percentage points. All businesses live and die by execution. Real people, with real money working hard to turn an idea into product or service people want to buy. Unfortunately, it takes years to figure this out. Most young entrepreneurs don't get this. They think an idea can make them millions – it can't. Guess what - very few people have truly original thoughts – the successful entrepreneurs are those that work hard – writing a term paper/business plan isn't real work, it's step one of a 1000. Brad Feld loves to send me press releases about companies that raised money on ideas I pitched him in the past – they executed, I didn't – good luck to them.

We'll see what happens when Mr. G comes around – at least I had fun running with the idea.

For now: Enjoy your FLIGHT:

Comments

[Peter Cranstone]

Paul,

He'd be better of at Tech Stars. There 5% of the company (he keeps 95%) is worth $300,000. You offered him 5% - 10% and then reduced that to 1%. Why?

That's so far out of alignment with what the rest of the industry does. It's not a partnership at all. In fact he'd be better off selling you the complete idea for $300 - 500k and then you have 100% ownership.

Now as you say all that remains is execution and that's down to you.

1% is totally unfair (IMO) - there is no incentive for him. Now sure there's a risk - however for you, a proven entrepreneur with a successful background there is a way to mitigate that risk.

He did the right thing to walk... the partnership is too one sided.

Looks like Flight will have to abort this takeoff role and return to hanger for awhile.

Cheers,

Peter

[Paul Berberian]

I agree completely if he was going to work the idea. But he is not. He is walking away - unable to contribute to the business in any capacity. If he were to remain involved he should get more. But an idea without work or money isn't worth much. TechStars would be great if it was a technology company with some IP, he was running/working the company, and he was building something that couldn't be duplicated in a few hours. Don't forget this idea is all about marketing and distribution - that takes money, lots of it, and execution.

[Todd Vernon]

Sounds to me like you should let him own 100%, of nothing :-) World is full of dreamers, not many do'ers however...

[Kyle Maynard]

Hello Mr. Berberian,

I have an interesting business idea that I'd like to discuss with you and so I thought I'd drop you a line and hope to get in contact with you.

I know I've been quite vague thus far but I'd prefer to discuss it in private via email: KyleMaynard@KaimanTV.com

Thanks.

[shadi]

I think that Mr.G is entitled to nothing and that it is good that this guy is giving him 1% because he could just say that it is his idea and just fuck that guy up since he did all the legal work, make everything under his name including the idea