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Hi CUPROGUE,
I would suggest that you, your investor and maybe your dad sit down together to work these questions out. THEN HAVE AN ATTORNEY draw up a legal agreement base on what you three came up with.
Get an attorney.... trust me on this one.
I failed to have legal advice during my initial phase of business (wanted to save the money and put it into the business instead) and now in hindsight, after having an individual I trusted with everything turn on me it would have saved me thousands of dollars.
Don`t be shortsighted... when it comes to money a good attorney is your best defense against unscrupulous persons you might have thought were your friends.
I would say that BEFORE you get an attorney you should have most of your ideal scenario already worked out and use the attorney to make it happen. Believe me I have wasted a lot of money answering basic questions for hundreds of dollars an hour while the attorney just brainstormed with me about possibilities. Do you homework first, pay an attorney second.
I have invested in businesses and sought investment in my own projects and the key to answering your question is the type of return normally expected in your industry. You don`t give us enough details to really know. However, as previous post said, investors will look for a rate of return that is commensurate with the risk they are taking. And you need to know that an investor doesn’t evaluate the risks you are talking, they care only about their own bottom line.
The right structure will depend on the nature of the business, your track record, realistic projections, actual cash flow, and your debt/equity ratio. Whether or not you give up equity in the business is going to be a factor of how fast you can pay back your investor with a solid rate of return. If you have question marks around your ability to cash out your investors quickly, you will probably have no choice but to give up an equity stake in the company and, more likely than not, give up management control also.
Not sure if I can be of service to you or not, depends on what State you are located in. I run a referral practice helping connect the right client to the right professional. This often includes lawyers, business consultants, investors, etc. Check out my website and I`d be happy to talk to you if you are in Michigan. If you aren`t, there may be some other ways to help. Many lawyers do not charge an initial consultation.
Best wishes,
Lori
Thanks to all for the help.
Travis
Travis,
Just my two cents worth! You have two kinds of financing - debt and equity. Debt financing is getting a loan (like going to the bank) from your investor and you make payments that are either fixed or based on profits, etc. Equity financing is where the investor shares ownership of the company with you. My personal preference is towards debt financing because equity financing makes your friend your partner. You may be able to set the transaction up so that you have all the control, but as was mentioned earlier, you may end up in a situation where your partner wants to be cashed out. With debt financing, it`s all spelled out in a loan agreement and you give up no control of your company.
Debt financing isn`t always possible, but in my opinion, it`s the first choice.
Good fortune!
I second some of the previous comments on 2 key issues - 1) do your planning before signing contracts / agreements 2) get help with this
My practice recently affiliated with BEI because we`re now connected to advisors around the country who specialize in helping folks with issues like yours.
Please contact me directly for referrals or subscribing to my e-newsletter on exit planning.
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