Would you invest in this deal? All the risk, no ownership, and a profit cap, to boot!

By | October 26, 2009

Tyler’s looking for some ‘suckers’ who are willing to be investors for his latest project, a Flash based site. The terms are weird:

I am basing the following options on the project costing $5,000:

Investment Return Buyout

$1,000 15% for 18 months 5x
$2,500 37.5% for 18 months 5x
$5,000 75% for 18 months 5x

I will only accept investors up to when the cost of the project is met (Ex. If 2 investors want in at the $2,500 level then it will be closed there).

The Return is based on site income, whether it be from advertisements on the site or paid memberships.

If you do the math, the site would need to make a total of $6,666 (bad omen? haha) during the first 18-months in order for you just to break even. This works out to an average of $370 a month. Therefore, if the site manages to make $13k during the first year-and-a-half, you’ve doubled your investment.

There will be a buyout clause, where at any point I can buyout the shareholder for 5x their investment. This buyout will be on top of any return they have received so far. For example, if an investor invests $1,000 and after 5 months I want to buy them out, they will keep whatever Returns they have made so far, plus $5,000 (5x) for the buyout.

The 18-month Return timeframe will begin once the site is finished its development and goes live to the public. (More)

I can’t understand this at all, Tyler.

Are you borrowing the money or asking for an investor? Really. If you are borrowing you should offer repayments as part of the plan, a potential interest rate to evaluate the risk involved.

If you’re looking for an investor, then you really ought to be looking for someone who can bring both cash and expertise (ideally). If not expertise, at least cash. But then you must sell them part ownership.

Are you looking for a payment from future cashflow? Then if so, what is your security?

I can’t understand, from a potential client’s position, what you are looking for, nor can I see any real reason to invest. You don’t cap my risk, but you cap my profits. It really seems like you want to have your cake and eat it, with respect. If I were doing this, I would cap the risk, so my investor’s feel better, and reduce/remove the cap on the profits. Given your situation, though, the relative small size of the investment, why don’t you just pony up the money yourself, and avoid all this hassle?

If I were a BBC Dragon, and if I had to listen to this, I would reject it out of hand for the reasons outlined. There’s no product to showcase, no example, no cashflow projections other than airy-fairy numbers, no estimates of expenses (server costs, design costs, admin costs), no security for investors (not even partial ownership), nor do you even clarify if the return of capital comes from income or after costs.

So what is this? I would love to know. Let me know.

Author: InvestorBlogger

Investorblogger.com takes you on a 'Random Walk To Wealth' through money, investing, blogging and tech. We'll explore my insights, mistakes, and experiences together.

5 thoughts on “Would you invest in this deal? All the risk, no ownership, and a profit cap, to boot!

  1. Andy

    You’re not going to get any answers. Tyler can be like that. In addition to this (which is, let’s be blunt, a rip-off), he’s also tried to “recommend” a logo company while secretly injecting himself as the middleman and pretending they charge more than they do so he can pocket the difference.

    Most damning, however, is the fact that he made quite a bit of money over the years on his Poker Forums site based on traffic numbers that he later admitted were inflated; not deliberately, mind you. He was just using some dinky counter; when he switched to Analytics, he found he’d been grossly overstating the numbers. I asked him if he’d every told all the people who’d paid him to advertise, and not only did he not answer, but he banned me from commenting on his site. I took that as a “no.”

    Makes trying to dupe people seem like small potatoes, doesn’t it?


    1. InvestorBlogger Post author

      Andy, I was disappointed that you chose to post this comment while failing to provide a legitimate email address or name. I do however, have your IP address noted.

      I won’t take issues with your accusations. Why? Because that is not my position in this posting: All I am trying to do is figure out if this ‘investment’ makes any sense at all. Apparently it does to Tyler. It simply doesn’t wash with me. So he can back to the drawing board, and reconfigure it if he needs to. But that’s his choice. If he gets any investors at all, I’ll be surprised… but some people may see an opportunity to work with him on this project, there are possibilities. Is this for everyone? No. Is it for me? No. Is it for you? Caveat emptor.

      Whenever you invest with someone, part of your DD is figuring out where the money will go, what is required, who you will be working and much more. Any investor making any investment needs to figure out if they can work with their potential partner, regardless of the money. Too often, it turns out that partnerships fail because one partner failed to understand that personal relationships are very important. For example, partners falling out is a huge problem for foreigners investing in China, and it’s usually about money, but not always.

      I will point out that many counters online, including AWstats and raw logs, accurately state the number of visits and a whole bunch of extra information. However, Analytics is a slightly different counter: Analytics tries to measure real people traffic and examine what people do. Other trackers measure EVERYTHING, including robots, spiders, etc.. that can visit your site. Of course, this greatly increases ‘apparent’ traffic. It’s usually a distinction lost on people starting out in the E-World, and I know that I made that mistake too. Every hosting platform includes some kind of traffic measuring, so I wouldn’t be surprised that everyone does that, too. I hardly think that would impugn what was done in good faith otherwise.

      However, going around making accusations that you don’t substantiate, posting comments with fake email addresses and non-identifiabke names, hardly does YOU any credit. And that is what I take issue with here.

      1. Andy

        Really? If it’s an issue of substantiation, his blog posts on traffic issues and the logo price inflation are completely public. I don’t think he even denies these things at all; he even argued with commenters about the logo issue. If you want me to do the legwork of digging up the old posts to grant what I’m saying some kind of legitimacy, I suppose I could, but I’m not spreading rumors. This stuff is just sitting there.

        Not sure how you would determine what my real name is, frankly, but if you want me to email you personally I’d be glad to do so. Not that it really has any relevance to what I’m saying because, as I said above, I’m not spreading gossip. This stuff is public. I just don’t care to get dragged into some flame war, is all.

        I went out of my way in the previous comment to note that I don’t think Tyler was deliberately inflating traffic numbers. But that doesn’t absolve him of doing the right thing when he finds out how dramatically the numbers he was selling differed from reality. Also, while a lot of people “starting out,” as you say, may be confused by some of these things, Tyler has been running websites for quite awhile, so I have the imagine the significance of the discovery was not lost on him.

        If that makes you want to ignore everything I’m saying simply because I don’t relish the idea of getting into some silly argument, that’s up to you, but I’m not asking you to take my word on anything.

      2. InvestorBlogger Post author

        Andy, Thanks for your reply. I do seem to remember some discussion about the logo company, but not the traffic issues. I can go look through the archives myself, thanks. I am not going to get into any flame wars (trust me), especially on my own blog.

        I’ve already posted twice in his thread, but not seen any answers to my questions there. So I guess that’s that. But in fairness, some of the other commenters have followed on theme… to which he has not replied at all. I guess my primary concern was not being able to separate what was an accusation from what was fact.

        I personally believe that his original post on the ‘investment’ tells me all I need to know. That it’s really not a serious proposal. That he doesn’t know what he’s getting into, really either in terms of the technology or the business side of things. That he really needs to do more work on this project; and he needs to find partners who are ‘in’ the project not just financing it. For the risk involved, it’s just not worth it. I think any reasonable investor will see that immediately, esp. if the buyout clause is compulsory. I would love to read the terms of the contract, just to see how seriously the investor is screwed! It would make great reading… “By their words, ye shall know them.” And we do.

        A lender won’t lend because there’s no security or guarantee for return; an investor won’t invest because upside is seriously limited, and downside is 100%; only a gambler will try his luck. I think Tyler has been gambling too much… and it shows. Because only a gambler would see the possible advantages to him/herself, and ignore the house rules totally. And that’s Tyler’s point: He’s trying to make himself the house by using ‘house’ rules – ie. I set the rules, you play that’s all. If you lose, sorry. If you win, we’ll let you win something, but you can’t break the bank because I’ll buy you out.

        Only a fool or a gambler would invest on such premises. It is SELF-EVIDENT. So don’t worry about it. Unless Tyler doesn’t want to restore his image, I think one day, he’ll regret making a stupid offer like this, without further clarification, discussion and negotiation. It will likely turn off any potential partners who would do business with him. So, Tyler, what say you?

  2. Andy

    I understand your concern; I should have been upfront about the fact that this was all out in the open. And I should make clear that I’m not accusing Tyler of fraud or anything extreme. I’m mainly just noting a pattern of diving headfirst into things. He sinks lots of money into things without real prospects sometimes, and I know he’s hired plenty of developers who’ve basically bailed on him. There’s a lot more ambition than there is discretion, and warnings don’t seem to do much. I get that anyone who puts themselves out there has to be willing to ignore the trolls and relentless critics, but sometimes people take that too far and ignore even valid concerns, and that seems to be what’s been happening.

    In other words, these sorts of things have happened enough, and when profit and reputation have collided, Tyler seems to err on the side of profit. That’s not someone I’d want to do business with, even if the investment options offered were reasonable.

    But, to get back on topic, you’re right. Regardless of Tyler’s substantial history, the whole thing is a pretty blatant way of minimizing upside and maximizing risk. The only person who would get in on this project — whatever it is — is someone who a) doesn’t know a thing about investing, or even basic financial discretion, and/or b) someone who thinks Tyler is some sort of Internet celebrity and is just excited to be involved in something he’s doing. I think he’s probably getting a bit of a wakeup call on both fronts here.

    If I had to guess, I’d guess that this is going to get shut down pretty quickly. Maybe he’ll address it publicly (and briefly), or maybe it’ll just quietly fade away. But I’m not holding out hope that it’ll be much of a general learning experience, based on past incidents.

    “By their words,” indeed. Amazing how much that book has to say even about technical things sometimes, isn’t it?

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