There are no real answers to those questions - this is something that you should sit down with and discuss with the investor and an attorney. This way you can hammer those issues out and get everyone on the same page - everyone knowing what to expect it and when. These are good questions but all of them need to be negotiated between you and the investor.
---Business Money Today - Small Business Loans
Congrats on the new venture, Kacknyne; I hope it really takes off for you.
1) is a function of all the facts and circumstances. Typically, outside equity money is pricey and you want to get the investor taken out as quickly as feasible. But more crucial is the imperative to not put the operation into a cash crisis, which can easily happen if you're making aggressive payouts to the investor and suddenly your revenues go unexpectedly south. As you may have guessed, then, how quickly you can get your investor taken out has a lot to do with your cash flow projections. Or perhaps this guy brings some valuable mentoring to the equation, or contacts, or whatever, and you'd kinda like to not lose those intangibles so quickly. You might consider paying down his investment to some fraction of its initial amount, and then letting the remainder ride for the long haul, where the cost to you of his reduced investment is exceeded by the value he contributes in the form of those intangibles.
2) The ROI is also situation-dependent, and will be part of your negotiations. Very generally, the riskier the business (the level of uncertainty associated with the cash flow projections) the higher the return that the investor will demand. You might be able to mitigate somewhat his demanded rate by inserting some provisions into the deal such as: • you agree to take a very minimal salary (if at all), until his investment balance is paid down to $X; • you agree to give the investor a certain level of managerial say-so (or perhaps the right to veto larger decisions) if the profits payouts fall below some pre-defined schedule; • stuff like that.
3) See previous. If the guy has a lot of know-how to contribute in addition to his cash, giving him a voice might not be such a bad idea, within reason. It also might be a way to reduce his required return, since having some defined level of say-so helps quell his sense of risk. But if he's a little Napoleon you might wanna keep him out of the front office when it comes to calling the shots.
4) is another negotiating point, and it varies. Some deals put caps on the outside investors' returns, such that their investment is stamped "done" once the investor has gotten back his original capital plus some pre-defined X% annualized overall return. In other deals the investors say "this business scores very high on the Risk-O-Meter, and us cash boys are shouldering the substantial majority of the risk, and so should this bet really pay off big, we get to contribute in the windfall all the way. That's just fair compensation for our taking on the risk and making this venture possible."
So the bottom line is that a lot of your questions really are the stuff that negotiations are made of, and no definitive answers can be given until one's looking at all the details. But by being aware of the different deal-structuring possibilities beforehand (a few of which I've mentioned above) you can at least hit the negotiating table with some give-and-take possibilities already in mind.
Best of success with it!
Hey there. My fiancé and I are getting ready to start our first business. She is a dog groomer and has always wanted to own her own shop. We have an investor interested in helping with financing. He is willing to put up $30,000 for start up costs. I have a few questions for anyone with experience here.
1. How long should I expect this investor to stay "vested" in our company? I was thinking 5 years.
2. How much Return on Investment should I be expected to pay out? Like percentages of profit.
3. Should this investor have a say in the company, or just collect his share?
4. Should there be a cap on the Return on Investment? For example, if the business really takes off and he makes $90,000, should there be something in the Investment contract terminating it?
Please, any help is greatly appreciated.
Are you taking on an investor or a partner?
The 30k can be a loan or can be used to purchase into company for shares, this needs to be negotiated.
When defining terms it is always to define the exits for both parties incase things do not work out.
It can be awkward to address but it is business and sometimes things do not work out