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do investors usually want a percentage of your company?

    • 0 posts
    July 13, 2007 5:08 PM EDT
    I suggest you think of it like this. You can get money one of three ways:

    (1) Give up your own money. Either by investing your savings, or
    "bootstrapping" the new business by using your ongoing cash flow (i.e.,
    paycheck, or money from another business. You are taking on all the
    risk, but that means you get all the rewards if your business is a success.

    This can work if you have extra cash, a very low startup cost, or lots of
    savings.

    (2) Give up interest - by taking out a loan. May be credit cards or home
    equity line of credit, in your name, or a line of credit, credit cards, or
    small business loan, in the name of the business. They take on moderate
    risk, because you pay them interest regardless of how the business is
    doing, and you are still on the line if the business fails if you co-signed.

    This works for relatively small amounts of money, like a few thousand to
    a few tens of thousands of dollars.

    (3) Give up ownership (equity) - by getting investors. You give investors
    a share of ownership for them giving you money, which they are willing to
    do because they hope to get a big return. They are taking on risk,
    because if the business fails, they get nothing.

    Typically they are investing hundreds of thousands (angel investors) or
    millions (venture capital).

    Hope that helps!

    Elizabeth

    Elizabeth Potts Weinstein CFP JD
    http://www.thewealthspa.com
    Blog http://
    elizabethpottsweinstein.com

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    • 15 posts
    June 17, 2007 1:20 PM EDT
    I have a web startup & originally was looking for an investor but now the seed money is much smaller than I anticipated & I cannot see giving any percentage of my company for this small amount. I am seeking 15k. My question is can I approach investors & ask them to invest the 15k with me paying them back with interest instead of offering percentage? Also if I was "loaned" the money how much interest would be fair to pay them & at what terms (compounded quarterly, monthly, etc)?

    I have some contacts that have the kind of money that I need but I want to make sure I know what I am talking about? Thanks guys!
    elsizzle20002007-6-17 18:24:56
    • 66 posts
    August 2, 2007 2:32 PM EDT

    Giving up equity is the last thing you should consider.  $15K in seed money is easy to get through the SBA (for one of my companies I got $250K from them) - but it requires a PG (personal guarantee).

    Also look into government funded grants - you would be amazed at all the variables that qualify for seed funding through grants.

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    Mike Michalowicz
    Author of The Toilet Paper Entrepreneur

    • 927 posts
    June 18, 2007 6:57 AM EDT

    Just a few general comments:

    1. Those that supply the capital look for a return that is commensurate with the risk - as they perceive it.
    2.  Most start ups are perceived as high risk.
    3. Length of time before the return is a risk factor.
    4. For such high risk situations, a return of 25% per year (often more) is what is expected. If one has to wait for 5 years for the liquidity event -the math says they will need to get a multiple of 3 (or higher).
    5. Since most businesses won`t produce this kind of cash, the only real way for the people to get their return either a public offering or merger/sale. 

    From a total cost of capital perspective, debt funding is considerably less expensive -if one can get enough of it.

    Generally, lenders don`t see themselves as "investors" from the risk taking view.

    Good luck.

    PS: Be aware that most States have usury laws which limit the amount of interest you can pay. 

    robertj2007-6-18 11:57:55

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