How to estimate the value of an existing product? How to pay when no money?

Being currently considering to start my own product and having no knowledge on how to do that concretely, I ask advices from my mentor Leo and my friend Mike. Both gave me super valuable advices that I think I would share for your own learning 🙂

Situation:
A know someone who has a product I would like to work on. I know he is no more working on it, already give up 1 year ago and try to sell it. I know he is working full time on another project.
I dont have any money, I just can see the potential of the product as a regular users and because I have experience in Product design and user experience / feedbacks analysis.

Question 1 to Leo:
Is that cool that I ask the founder to "give" me his website, no valuation attached and I just gave him – I don't know- 10% of the company valuation at my first round of investment?

His answer:

DON'T DO THAT!!!!!
it is very important to??negotiate??from the beginning the specific term of passation of a product and its current valuation.
You can be a cool person, he can be a cool person but when in 3 months you will have work and improve the project, the product value as increased but because you never fixed clear terms, that is where both of your perception will conflict.
You ming think your contribution if for 90% of the new valuation, he will think it is for at most 30%.
You will both feel frustrated and unhappy. End of the dream.
if you make the effort to put a price formt he start and the other party agree, then it is cool. No turning back. Write it down on a paper and make both parties sign it, even just for the symbolic. You both found agreement of what the product was worth at start.
Now if you dont have money you can always found a financial solution:
– Pay 10% up front and the rest in 3 times every 4 months.
OR BETTER
– Give them 10% in shares (to be fully diluted)
– Pay 2/3 of the rest over 2 years (monthly, quarterly or yearly whatever)
– Third year let them choose to get the rest of the money or to get??1% of product yearly revenue for the next 5 year.
(Option: if they let you make the choice in 3 year of cash or revenue sharing – increase their share of revenue to 3%).


Question 2 to Mike:

He The founder gave me 100K of valuation for his product but I have no web skills what so ever to know if the website is worth. Can you have a look and tell me what you think? Can I request them to see the source code before deciding?

??
His answer:

Hey Carole,
They probably won't want to let you look at the code unless you do it on their computer so you can't just make a copy of it.
What they should let you see, though, are their traffic numbers and how much revenue they make each month. ??That's the bare minimum you should see when you are buying a company (and I'd get a contract for the sale that specifies that these numbers have to end up being correct or else you can get your money back).
Here's the article I told you about recently: http://www.softwarebyrob.com/2012/01/25/the-inside-story-of-a-small-startup-acquisition-part-1/. ??He has another series of posts about a different acquisition he did, along with tips for how to avoid getting a bad deal:??http://www.softwarebyrob.com/2007/10/23/the-inside-story-of-a-small-software-acquisition-part-3-of-3/ (linking to the last article with the tips; you may want to read the whole thing). ??He did actually convince the seller to show him the source code, so maybe you will be able to as well.
Honestly, I don't know a lot about pricing a software system for sale as a whole company. ??I feel like 100K RMB is quite a lot, though, if all you are buying is the source code. ??If there are lots of customers and/or an amazing custom UI, that will add to the cost.
Overall, you're trying to figure out how much time and effort buying something will be versus building it yourself, and they're thinking about how much time and effort they already put into the product. ??These are completely different things, unfortunately.

-Mike
P.S. ??If the site is put together really well and will be easy to work with in the future, 100K RMB isn't too much. ??A decent programmer costs $8K USD/mo in the US, so 100K RMB = ~2 months of decent developer time. ??I'd say the fact that they're starting there means you can negotiate them down at least 20-30% regardless of their actual numbers. ??If you can figure out a few reasons why it's not worth more, you can probably convince them to go even lower.

Best of luck!

If you found that useful, leave me a comment!

About Carole (code name 烤肉)

I work in tech since 2008, moved from Reunion island to Paris, Beijing, San Francisco and ended up in Berlin in 2014.
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