Forums: Discussions for entrepreneurs and small business.

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!

There`s a difference between an investment and a loan. It sounds like you`re looking only for a small loan. That`d be a whole lot easier on you, and wouldn`t involve giving up equity in the company.

Is there a way you could parcel out this loan into smaller increments as you move through different phases of the startup?

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. 

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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

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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Elizabeth Potts Weinstein, CFP(r), JD

Website - http://www.TheWealthSpa.com
Blog - http://ElizabethPottsWeinstein.com
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(800) 752-3592
fax (408) 705-2040

**To get your copy of the Special Report, How to Avoid the Top 10 Money Mistakes, go to http://www.thewealthspa.com**

You are correct; offering equity in return for a $15,000 investment doesn’t make any sense. Just think of the costs for getting your financial records audited, drafting legal documents such as shareholder agreements, stock purchase agreements, and amending bylaws, and last but not least the expenses associated with monitoring such an investment. All this needs to be covered by the proceeds from the investment and the estimated financial returns for investors over time.

Having said that, you are not completely off the mark with your intention to borrow money from investors. As a matter of fact, very few seed or first round investments are done as straight equity deals. More and more investors tend to fund these deals using subordinated debt, which will convert into equity once you have achieved certain milestones.

However, if you in deed require only $15,000 in seed money, you might want to take a look at the Small Business Administration (SBA). They offer a wide cross section of loan products tailored to meet the needs of entrepreneurs and small businesses. There are also various state agencies that offer similar financial services.

Please feel free to share your business plan with me. I will be glad to take a look in order to be able to give you a few more pointers.




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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

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