   I'm an idiot, can someone explain equity?
  I have an investor who is willing to put X amount of dollars into my game for 40% equity...now, he was pretty vague in his offer, so I don't want to sound like an idiot by asking him exactly what he means, so can anyone shed some light on EXACTLY what he's talking about? I figure if I send an email saying "UHHHHH HUH?" then he might just lose interest.   
  In general, equity just means ownership. He wants to "own" 40% of the business. The specifics of what that ownership entitles him to need to be outlined in a partnership agreement. You can have a lawyer draw one up for you.   ;  The first thing to be clear on is whether he wants equity in a single product, or equity in your company, which would mean his investment would net the same portion of future products as well.Wikipedia has an answer to your question, and from its content I would summarize, though I'm no expert, that Equity is the amount of financial interest a party has in a product or company, and that it can be extracted once liabilities are paid -- that is, Equity can be negative in dollar terms, if the worth of the product or company is less than its debts. In simpler terms, the investor want to be entitled to 40% of profits, and if the venture ever goes belly-up, he's entitled to 40% of whatever assets remain (office furnature, equipment, intellectual property rights, etc.)   ;  If you think he is being vague, then you should ask him to clarify what he actually wants for his money and spell it out in plain english.  In general equity refers to ownership in a company represented by shares, therefore I assume he is asking for 40% of the shares in your company (if you have a registered LLC, S-corp or C-corp) in exchange for his investment.  But if you are not sure, you may want him to clarify his understanding of equity because many people confuse "equity" with an "interest" in the game's underlying intellectual property rights or with the right to "participate" in the game's profits.  But this is something you need to understand as well if you want to be a serious game developer.  Your unfamiliarity with this common terminology is a sign that you need an attorney to help you with the investment agreement.  If you take the investor's money without properly documenting the transaction, then it could be later classified as a personal loan for which he could demand repayment from your personal assets to settle the debt.   ;Quote:Original post by ItSnowedInTexasI have an investor who is willing to put X amount of dollars into my game for 40% equity...now, he was pretty vague in his offer, so I don't want to sound like an idiot by asking him exactly what he means, so can anyone shed some light on EXACTLY what he's talking about? I figure if I send an email saying "UHHHHH HUH?" then he might just lose interest.Of course, so don't do that. But to ask him, "tell me more about this 40% equity thing. What kind of arrangement do you have in mind exactly?" is just good sense and good business.;Quote:Original post by kdog77Your unfamiliarity with this common terminology is a sign that you need an attorney to help you with the investment agreement.  If you take the investor's money without properly documenting the transaction, then it could be later classified as a personal loan for which he could demand repayment from your personal assets to settle the debt.Definitely.  You'll want an attorney anyway to help you work out the legal clauses covering things like:1) what happens if you don't ship on time2) what happens if you don't ship at all3) what happens if you ship but make zero dollars4) what if you make money.  who gets paid first?  do you split all incoming dollars or does he get 100% of dollars until his initial investment is paid out.And you'd probably need to consult with one anyway to figure out how to incorporate: LLC or C-Corp, in what state (like deleware is nice under certain circumstances), etc.  Or if you have employees you'll almost certainly want one to help you draw up employment contracts & stuff.-me   ;Quote:Original post by PalidineAnd you'd probably need to consult with [an attorney] anyway to figure out how to incorporate: LLC or C-Corp, in what state (like deleware is nice under certain circumstances), etc. The Small Business Administration can help you with that kind of advice too, and for free. www.sba.gov (assuming you, the OP, live in the USA).;  Before you sit with a lawyer to define your business structure and help you write an investment agreement, it doesn't hurt to ask for an MOU (Memorandum of Understanding, aka LOI / Letter Of Intent) to your investor and work from there. MOUs are not legally binding in most jurisdictions and signing is optional. It read like a synopsis. You get - in writing and in plain every day language - what he thinks from the deal without you having to sign anything. If there are things you want to add or modify, then you do and send him back a new document version. Repeat until you both agree to go forward with a formal contract or part your ways. Lawyers typically like to start working from MOUs because all the business clauses are pretty much nailed down beforehand.http://en.wikipedia.org/wiki/Letter_of_intent-cb   ;  Just an update. My investor is going to set up a company in my name and the way it's been explained to me is that they'll then buy 35% of the company (via stock I believe). I'm still not exactly sure how this works from a financial perspective. I'll talk to him Thursday when the contract is completed, but does anyone have any ideas on what I can expect? I guess the thing is that I don't really understand how stocks work. The big thing is figuring out how they get their investment back. It would be nice if I had a few ideas going into Thursday of what to expect, in case any of you are familiar with this type of situation.   ;Quote:Original post by ItSnowedInTexasMy investor is going to set up a company in my name and the way it's been explained to me is that they'll then buy 35% of the company (via stock I believe).Who explained it to you, the investor, their lawyer or YOUR lawyer. Hint: Only one of these answers is acceptable.Quote:...but does anyone have any ideas on what I can expect? I guess the thing is that I don't really understand how stocks work. Yes, you can expect to get screwed over and find out, down the line, that you don't own your own idea/company because you let someone else do the paperwork - unless, that is, you get your own lawyer to advise you. Anything else is utter, utter madness - sorry but I can't state that strongly enough. Never ever take business or legal advise from the other party when agreeing a deal. Their interest is to improve their position, not yours. If you walk in blind, without a lawyer or business adviser to help you are risking everything.Quote:The big thing is figuring out how they get their investment back. It would be nice if I had a few ideas going into Thursday of what to expect, in case any of you are familiar with this type of situation.The normal way would be through a sale of the company if 5-8 years time, at which time most investors will expect to make a 300-500% return. Alternatively they may just take a % of everything you earn for the next X years. 