Forums: Discussions for entrepreneurs and small business.

I have a question on the funding of my LLC.

I have an investor that wants to invest $50,000 in my new business. In exchange for that I am giving him 15% equity in the company.

The person who drafted the operating agreement (not my equity partner) also included my LLC being charged interest on the loan, to the tune of 12% a year.

Now, if I`m funding with equity (15%), why would I also be funding with debt (12% interest per year).

Myself and my equity partner know little about these arrangements. If I have one minority / silent partner that puts up $50,000, should I be giving equity and paying interest on the loan?

I guess I don`t know what the "norm" is, but I`m really not interested in giving up equity and paying interest.

Any thoughts would be great.

John

John,

No, this isn’t the norm. Typically you would either do debt or equity financing. Typically the only place you will see them wrapped together is in leveraged buyouts of large corporations (LBO).

 

On the other hand, if you’re really desperate for money and this is your only option, you may decide to accept the terms.

 

$50,000 for 15% gives your business an implied valuation of $333,333 ($50k/15%) which is very generous for a start-up or early stage company (depends on what kind of company you’re starting). So, perhaps the debt is justified.

 

Seems surprising that the person drafting the Operating Agreement would slip the debt in with out the knowledge of you or your investor. Sounds suspect to me.

 

Also, check with an attorney and/or CPA, I question if you should do this as an LLC.

 

Mark

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The Virtual Company Blog ●●●●● 2002 Ernst & Young Entrepreneur of the Year ●●●●● 2004 Inc. 500 ●●●●● Spare Bedroom to NASDAQ in Five Years ●●●●●

Thank`s for the feedback.

Are you thinking a corporation would be better?

John

John, Best to check with an attorney and/or a CPA as they can address your specific situation.

In any case - do not sign any investment docs without attorney review. Be sure the attorney is representing you alone. Even if money is tight now, this is a critical thing to do.

Mark

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The Virtual Company Blog ●●●●● 2002 Ernst & Young Entrepreneur of the Year ●●●●● 2004 Inc. 500 ●●●●● Spare Bedroom to NASDAQ in Five Years ●●●●●