I have a friend who is trying to accumulate $2.5M investor capital to start a $7.5M franchise of a proven company. His basic pitch is you are a partial owner, and he takes your investment amount and divides by $7.5M and that is your % in the company. I pointed out that my personal risk is really my investment divided by $2.5M since he believes he will be able to get more traditional funding (I don't know if this is really true or not) for the remaining $5M.
My hypothetical 100k investment will pay nicely, and just based upon the expected return as an investor I "should" be satisfied. However, this is a start-up and I feel more like a partial owner since I'm assuming equal risk.
Without discussing the merits of his ability to secure another $5M, am I out of line for pointing out that once the loan is paid, he is personally going to have "ownership" of $5M of a $7.5M company for what will probably be a lot of personal time, and a paltry $100k initial investment? Is this normal, or is he going to have a hard time finding investors to subsidize what will essentially be his personal money making machine?