Forums: Discussions for entrepreneurs and small business.

I have an investor who will also be my partner. He has orally agreed to invest 50K in exchange for 49% ownership of co. Well we are getting ready to make out our written agreements & I am not sure if he will be investing 50k up front. He is making it sound like he will pay out the money as we need to pay for things. I am not comfortable with this as the percentage I am offering him is contingent upon the total amount of money he is investing. Also what if he decides that he changes his mind at 25k & wants to pull out.

Is it customary for investors to invest a total amount all up front or do they sometimes invest little by little over the course of the start up?

I see two options;
invest total 50k up front for 49% OR
invest less for less percentage.

What is "customary"? What would you suggest in my position?

I am meeting with him tomorrow & I just want to be well informed before I make any decisions.

Thanks!

Everything is negotiable. How strong is your position? What will you do if he walks?

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If he walks I seek another investor. I am so confident in my business concept that I have no doubt I would find another investor for sure.

So what is the "norm"? Do investors invest in increments or total amount up front?

I`d give this a lot of thought before I embarked on an arrangement such as you described.  Consider the following:

Are you putting any capital into the company at this time?

Are you comfortable with the valuation  for your business at $102,000?

Finally, you say you sold 49% - but if you let him pay the "bills" - he has control of the business.

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
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You two agree to exchange 49% of a company for $50K.  If the investor doesn`t sign the check for $50k, he has no right to 49% of the company.  One is exchanged for the other.

So if the investor only signs a check for say $10K,he`s entitled to 10% of the company until he signs the next check, etc...

AN important question is how much money is needed to really operate the business.  If only 10K is needed, take it and make a good profit, then up the valuation to say 200K.  The next 10K would get only 5% additional percentage of the company, etc...

Not knowing what the business is, I`d say 50K for 40% is cheap if the business is really viable.


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I would not agree. If $50K is needed and 40% is offered then taking $10K for
10% is not really the same.

The company might have 1 value if it is well capitalized and a completely
different value if it is running out of cash. Asking for $50K should not mean
that you will take a fraction and offer a proportional share.

Maybe it is a fine point but I think it is important.

I agree with John on the subject of valuation.  My point was about equitable exchange.  It`s a matter of contract.

I already said 50k seems to be a small amount for 49%, something I don`t deal with an investor but would use a credit card.for.

Yes there`re differences between selling 10% and 49%.  Investors would normally have to pay more than proportionally for higher %, especially for controlling interest.  Personally I won`t sell my controlling interest.


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what is "Private Placement Memorandum"?

PPM`s are generally advisable when you intend to have several investors.

In most states, "partners" -those investors who will be active in the company are exempt from the securities registration regulations.

You should have some formal paperwork, however. A stock purchase agreement and buy/sell terms as a minimum.

Robert Johnson

 

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com