Forums: Discussions for entrepreneurs and small business.

For friends and family members who put capital in.. What would be a good rate to offer them on the investment?

I am about finished with the plan and need to key in payback of the loan/loans.

Or how do you compensate your friend/family members when they buy into and own a portion of the business.

Jason

 

Jason:

We advise clients to treat their friends and family the same as they would other investors.

Generally, investors want a return commensurate with the risk - as they perceive it. If this is a loan you sould consider

1. Some states have usury laws that limit the amount of interest you can pay.

2. If the loan is completely unsecured - the risk to the lender is higher and therefore should produce a higher interest rate.

3. Time is a risk factor - the longer you will take to pay back the loan, the greater the risk.

Investors who receive equity usually want to know how they will get their return.Some ways include an IPO/merger/sale/or stock repurchase -to name a few.

Depending upon the specifics of your situation and the desires of your investor/lender, you have several approaches to a equitable and mutually agreeable "deal".

 

Hope this helps

Robert Johnson

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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

You don`t have to pose thier financial investment as a loan. Try presenting it as an investment. After all, that’s what it is. Show them your plan. Don`t put so much weight on wanting their money. Put the weight on how good your idea/plan is. Then when they want to INVEST they will.

As far as what the repayment plan will be… That’s very tough. It really depends on how able and willing your participants are. That is what negotiations are for.

One place to start is the current loan rate. Maybe they are interested in a percentage of the profit rather than a loan repayment. Are they willing to put in their labor for your plan?

Sorry I don’t have exact numbers and answers, and someone may have some standard numbers. But really, if your product or service is sought after, you will find people willing to invest their time, money, and wait for a result.


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Vincent Wilcox (a.k.a. KRAKR)
Drummer
My band: Letters Make Words

My experience has been that investors on a small scale; family, friends, etc. weren`t really investors but rather, lenders as they were most interested in payback timeframes and not the possibilities the investment represented.  

Everyone I talked to wanted to recoup their investment or loan within 2 years.  To me, that`s not really investing, it`s just a loan.  My family members were never quite able to think from an investment standpoint.

But, as a negotiating move now you could offer that once the business is up and profitable they get an ROI of x% and x% of their loan turns into a longer term investment.  And even though two years really isn`t a lot of time to get yourself up and running and profitable depending on your abilities and the loans or investments you secure, it may be enough. 

I ended up bootstrapping the business, running on my own dime and nobody took the risks but me.  The best thing about bootstrapping is I don`t owe anyone and the business is all mine.

I was in the same position you were back in February of this year. After discussions with my attorney we decided upon a dual strategy that would allow me to focus on both debt investors (family and friends that believed in my business plan and my ability to execute) as well as equity investors (external individuals looking for a stock position over a 3/5 year time line). I ended up offering my debt investors a Bridge Note paying 8% annually with as additional 20% Warrant (the ability to purchase a limited amount of company stock in the future, based upon 20% of their initial investment). I was able to secure approx: $100K in debt and am currently seeking an additional $350K from equity investors. I feel confident that a small group of equity investors whom I am currently negotiating with may fulfill my needs so that I can launch. The one thing that you need to keep in mind with regards to a funding strategy like mine is the legal costs of executing the debt strategy vs the equity. Good luck.

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Patrick Lawrence Kane
www.PeoplePawn.com
Patrick@PeoplePawn.com
1.866.383.PAWN
1.800.790.6762
(206) 972-7838

Patrick - On a loan, I would say you should pay them close to the market rate if your cash flow can support it. You might also want to consider making the payments on a quarterly basis as opposed to monthly. That way, if there is a hiccup in your cash flow, it will not be readily apparent to them and won`t cause them to put undue stress on you.

My personal opinion on having family and friends as shareholders is not positive based on startups I have worked for or consulted with in the past. I would say you are better off structuring any investment from them as a loan. That way you are paying them off regularly (which makes them feel more at ease) and they won`t be around permanently looking over your shoulder and second guessing your decisions. As far as compensating them, that could be set up in a number of ways, such as straight amortization payment, interest-only, royalty payment based on % of revenues, etc....

 

The best a startup can do is offer revenue sharing to family, friends and investors. This way they know that they`ll get a cut in your profits as they come in. I had listed my business with GoBig.com and www.breadstreet.com and I had investors that asked to be paid a % of monthly revenues. I think this works as you do not have to worry about fixed loan payments if your business is not making money.