I have this business idea and I need $150,000 to start it. I also need $150,000 to keep it running for six months, which “they” say I should have on hand just in case I need it. The first thing I want to do is hit up family, friends, and associates with this idea. I’m unclear, though, of what to offer them for participation. I can offer stock or a loan. In the extreme case, I can partner with someone.
Let’s say that people really want to bite into this. They love the idea and throw money at me. Is it possible to just grant myself 51% of the company even though I’m not putting any money into it and just sell them all 49% of the company? That is, $3,000 buys you 1%? Or would I have to put up half the money myself? The benefit to offering stock is that I still control the company but I don’t get to keep the pay for myself. I’d have to share it, wouldn’t I? What if I took a hefty salary out first? Can I do that? Also, can I put a condition on it that I can buy it at any time, like a callable bond?
Or I can offer them a loan. Let’s say they all accept 5% APR and I get my money from several people or just one person. The benefit is that I get to keep all the profits (yay!) but the drawback is that if the business goes under, I’m screwed and my family and friends are mad at me. But did I mention I get to keep it all for myself if I succeed?
There’s a third, gimmicky plan that I came up with last night. Since the business would be a service, where fixed costs are high but individual costs are very, very low, I was thinking I could start up a website/Facebook group that says “Want this in your area? Give me 20 bucks and you’ll get 3 free tickets when we open…a $60 value! If I never open, you get your money back.” That might raise me a couple thousand, I think. Problem is, I just gave my creditors a 200% return on their investment, since I could have charged $60 for the service. Or did I, since it would only cost me a few pennies to make good on their 3 tickets? FWIW, it was inspired by the Paranormal Activity marketing campaign from last year, where they won’t give it to you unless you vote on it. Could work…
Financial-savvy Dopers, what would you do? Is there a plan that I’m forgetting that gives me the best of both worlds? Ideally, I want to spread around the risk but be able to keep the profits if I’m right and the business takes off. I don’t mind giving my financiers a cut of the pie, but I want to be able to buy them out, not have them leeching off my idea in perpetuity.
For me, if I’m looking at raising $300k from angel financing, I’d first spend 3-5k on advice from a lawyer, stat!
I don’t get the “keep the pay for myself” (in relation to the stock) question as that would only apply towards dividends. I guess you’re looking at paying yourself a nominal salary, then bonusing/paying dividends at the end of the year?
FWIW, I know that many people have done it (hell, I’ve done it myself), but you really shouldn’t look at starting a business with the idea that you’re not going to pay yourself anything “until the business is capable of supporting me.” The entire point of a business is to “support you” and if you go 3, 6, 12+ months without a paycheck, you’re just screwing yourself out of a lot of motivation, desire, and, of course, money.
Very, very few companies grow to be a desirable size without outside financing. Even Microsoft, who never had a dollar of long-term debt until the 1990’s, finally had to go public in to fund its expansion plans.
And I wouldn’t offer my business plan for free over the internet! :eek: Make sure anybody who responds signs a NDA/non-compete or you’re just giving your idea away to potential competitors.
I haven’t decided that yet. I won’t know that until I know how I want to distribute the financing, if I get a choice at all. That’s one thing I don’t get about stocks; why pay dividends at all? Why not issue stock and keep promising dividends without actually paying any? I mean, once the person has bought the stock, what do I care how much it goes for? I’ve already got my cash!
At any rate, my comment was meant to say that if I have stock holders, then I presume I have to pay them something. That means there’s less for me. And if they don’t want to sell the stock back to me so that I own the whole company at some point, then they don’t have to (right?). I don’t want that to happen. I want to be able to say “Thanks for taking the risk. Here’s a huge settlement. Now please leave.” Without that last sentence, it doesn’t sound so appealing.
Meh. The chances that you’re able to capitalize on this is pretty much nil. I mean, you’d have to live in my neighborhood. Otherwise, compete all you want!
Sounds like you need to study up on business organizations, and get some professional advice. You talking about a standard corporation, S-corp, LLC, partnership, sole proprietorship, or something else? Each has pros & cons, and tax implications.
You wouldn’t have a prayer of getting professional investors to participate under any of the terms you lay out, but you may be able to [del]con[/del] persuade family, friends and associates to invest/lend.
Yes. But I would not go near a proposition that involved no money input by you. You will hear investors say that they want to see some “skin in the game” from you. Otherwise, you are just losing other people’s money.
Anyone making a significant investment is going to want some level of input/control, e.g. a seat on the board. If you get lots of people investing a small amount, you may avoid that. Venture capital companies would exert a huge amount of control.
In theory, but investors frown upon people taking out huge salaries before the company is profitable. If you went to professional investors, they would want to see and approve your business plan including projected salaries.
Sure, but at what price? Why would anyone risk their money if their upside is limited to the call price? Only if the call price is still a significant gain (callable bonds have to offer higher yields to compensate the investor for the risk of the bond being called).
Then send them my way - I have a bridge to sell them. Why would anyone accept 5% on an unsecured loan to a startup when you can get that return from bonds issued by Fortune-500 companies? Investors in start-ups want to see their money multiply, not grow in small increments. Now I do see that you said “loan”, but as the risk is just as much as if they bought shares, they should be looking for substantial gains.
Spread around the risk but keep the reward? And why would investors agree to get mainly the risk part of the deal?
But only a very small one, apparently.
So the people that provide the capital essential to your success are leeches if they then profit from it? I’d love to see your pitch to potential investors.
Why so harsh? I’m throwing out concepts here, not expectations. I’m not pitching you here, so why not throw out rosy, unrealistic numbers? Ideas are always best analyzed first from the extreme angle so as to get the best look at them. They can be narrowed down once they’re found to be feasible. Dopers are “on my team”. Why shouldn’t I ask how I can best set myself up for success?
Anyway, I didn’t get an answer to one of my “offensive” questions- if I were to incorporate, would I have to buy shares at the same price as everyone else, or could I theoretically give myself some free ones? Don’t worry about whether or not that’s realistic…just, is it possible?
You incorporate at a certain level of capitalization. Since you want to sell 49% of the company for $300k, you’re essentially saying that the company is worth about $615,000. You then determine how many shares you need to have issued, and at what price, in order to sell them to investors. 100,000 shares @ $6.15/share? 1,000,000 shares @ .615/share? 1,000 shares @ $615.00/share?
Of course, the above simplified plan assumes that you have 0 shares of Treasury stock, which isn’t good as it limits your future investing efforts.
You cannot give yourself “free” shares - where would you find them, if you have no shares owned by the company itself? You’d have to recapitalize, but that will take a lot of shareholder convincing and many of them may vote against it. If you had shares of treasury stock, you could issue yourself some (likely subject to shareholder approval), but they wouldn’t be “free.”
If you don’t know the answer to this, you probably don’t have a viable business in the first place (the value of an idea is contingent on how well you can execute on it. People who can execute well don’t research this shit on forums).
That being said, Kickstarter was designed for exactly what you were talking about with regard to idea #3.
I was harsh because I think you need to adopt a different attitude with respect to your partners who are providing the capital you need because I think you will need to think of them differently to get them to join you. I give you answers where I could. There were actually answers in most of my responses. Distilling them:
Yes, you can keep however many shares you want, but investors will expect you to share the risk, and the more you keep, the less capital you will raise.
Investors may expect to have some level of control.
Yes, you can pay yourself a hefty salary, but investors may be put off and may place conditions in advance that prevent it - unless you are making bunches of money that they share in in some way.
Yes, you could include a buyback option on any shares you sell (or, more commonly, have a first right of refusal to buy if they want to sell them).
Yes you can ask for loans, but you are a risky proposition and should expect to pay much more than 5% interest on them.
But really I think the most helpful answer I could give (and I made harshly) is to treat the investors as your partners. They are risking their money and will expect to have rewards commensurate with the risk.
You own the company and you own all the shares at the outset without having paid anything for them (you may have to pay some very small amount as part of the process of setting up a company). Then you can choose to sell however many shares you want at whatever price you agree with the investors. You do not have to sell at the same price to everyone, even. You get to control the price.
If you incorporate, you will need to set up Articles of Incorporation which define how the company is run and include things like shares and voting rights and restrictions on shares etc. If you search, you will find sample Articles and that may help you understand what is normal. LLCs have something similar.
Also, almost anything which involves soliciting the public at large (eg… website, facebook), is subject to the full weight of the SEC regulations. So don’t try that before you talk to an actual attorney. The SEC looks at what you mentioned in the OP as securities fraud, pure and simple. There are enough criminals actively running scams that no matter how honest & above-board your intentions are, you’ll be treated as just another scammer.
I’ve got a couple startups behind me. **amarone **speaks the truth. If you think you have the power in the relationship between you and the investors, you’re utterly underinformed.
Try this vignette. In exchange for your life savings, and 60 hour weeks at ~minimum wage for the next 2-4 years, you’ll be allowed to keep 5% of what “your” company turns into. And they’ll be able to outvote you on every key decision, from new product directions to when & how you finally cash out.
That’s how the VC business works. It follows the Golden Rule: They have the Gold, so they make the Rules.
Plausible business plans and “visionary leaders” are a dime a dozen. What’s rare (& hence expensive) is capital & the ability to actually execute the business plan. By and large, it takes all 3 things to make a success: the idea guy, the money guy, and the execution guy. Often the rewards to those roles go something like 5%, 95%, a typical salary. For execution guys with a track record and awesome negotiating skillz, it might be 5%, 85%, 10%.
That is the reality of startups. Sorry to help burst your bubble, but now’s the time. The lessons start getting much more costly later.
So would you recommend a bank, then? I’m a veteran, so I qualify for the Patriot Express program with SBA. They underwrite 85% and allow a max of prime+4% interest.
Ah. That’s where we disconnected. I’m not talking to partners, I’m talking to you guys. None of those things in the OP, I’d expect to actually happen (5% APR, having people throw money at me, etc). I’m expecting a long, hard fight. And I am putting my own capital into this.
Do you know how to make an amortization schedule or at least figure out your payment? Assuming you were able to borrow all this money how would the payment figure into your business and financial plan? That would be a good first step. If you can’t make the payments there’s no real point in getting started.
How much cash do you plan on putting in, incidentally?
In my experience most would-be or experienced entrepreneurs alike fall on one of two sides of the investor expectation continuum. They either talk about getting risk capital at 5% and being able to pay it back with no penalties or assume the best they can hope for is to keep 5% of their business and maybe get paid some money. Neither is remotely realistic. Your plans are frankly completely impossible. At least losing all your ownership and control is a realistic possibility. But honestly, people giving you that horrible prediction are wrong too. It doesn’t have to be like that if you know what you’re doing and do it right.
By the way, Chessic Sense, I realize you already said you’re not worried about competition, but FYI no investor is ever going to sign a non-compete or an NDA before reading your business plan. Asking for one is a good signal you’re not serious. That said, I realize JohnT was talking about doling it out to anyone who wants it on the Internet, not a serous investor.
Sure. Put it into a calculator at bankrate :). By hand, I’d just do APR^(1/12) and call it a close approximation for the monthly interest rate.
I don’t understand what you mean by “figure into [my] business plan”. As an expense, obviously. What else are you asking me?
Short answer: As much as I can. Long answer: I’ve got at least $20,000 for it right now. By the time I’m ready to plunk down some cash, I’ll have at least $40,000, probably more. My new job gives me a lot more money, so I think I can sock a lot away over the next year. My adjusted figure for startup is $225,000 lean, $250,000 comfortable. That’s enough to set up and run the business for 3 months penniless. So I’ll be a little shy of 18%.
I know 6 months operating expenses is standard, but the thing about my idea is I’ll have customers from day one. The launch party for these establishments are usually the biggest days they’ll have. Sales usually decline from that “hype” level to a “stable” level after a year. It’s not like, say, a sandwich shop where I have to build a strong base and deliver on a delicious product. It’s not like I have the overhead of, say, a Tshirt business.
Here’s my realistic expectation:
$40k from me
$20k from family
$70k from business associates that have expressed interest in the past (this has been in my head for at least 8 years now)
$100k from a bank at maybe 8% with a Patriot Express-backed SBA loan.
$230k total.
What I really need help with is figuring out what to give those family and associates. Stock? An interest rate? And what kind of company is best with this distribution? LLC, I think.
One of the advantages of equity financing is that your new partner is in it for the long haul. Normally your interests should be pretty closely aligned - you’ll both be looking for some kind of an exit with substantial capital appreciation. Many times what you both put in. If not, if you really just want a business that will generate income over the long term, any potentially investor is going to be seriously different than everyone is suggesting.
If you borrow money from the bank it’s either an installment loan or a line of credit. Either way you need to make monthly payments. If you borrow $150,000 for non-recurring charges and tooling up, will your business bring in enough money to cover $3500 a month in payments? What if you borrow $150,000 more for working capital?
It’s a much different decision than raising money through equity. Instead of giving up part of your business, you have to start paying the money back immediately. So you should be able to look at your plans and decide whether you can afford it. What if sales are half what you project? What if it takes you 3 years to be cash flow positive instead of 6 months?
One thing to keep in mind is that regardless of whether your business is organized as a limited liability entity, any bank lending to you is almost certain to require you to personally guarantee the loan. I’m always amazed at the number of people with the notion that just because you’re organized as a corporation of LLC or LP, you will be able to borrow money from the bank and not pay it back if your business goes under. Yes, if they loaned money to your business, your liability would be limited to what you’ve invested. But bankers have also taken Introduction to Business 101, which is why they require shareholders/partners/members to sign unconditional guarantees as individuals.
The reason I bring this up is because if you do grant any kind of equity to any of your partners - family or business associates - they are likely to also have to guarantee the debt personally. It will vary by lending institution and program but anyone with more than a very small stake in the company will probably have to guarantee any loans before the bank will write them, even SBA loans. You could avoid that by issuing a convertible note, but of course you’d have to report that debt to the bank and it’d make it harder to borrow.
And you should follow JohnT’s advice and meet with a good securities lawyer. See if he’d be willing to bill you for a few hours of his time for preliminary advice rather than charging you a few thousand for a retainer up front.
One thing I have no experience with and you should definitely consult a lawyer is doing private placements with non-accredited investors. As Palooka said, what you are dealing with is private equity. With an accredited investor, like any angel will be, let alone a VC, you have a vast amount of latitude within the bounds of what they’ll agree to. Obviously it’s legal to get a family member to invest or loan money to your company but I don’t have any experience with it.
That said, you should realize you’ve got a lot of options and think more about what you can get them to agree to. You don’t have to limit yourself to either pure interest carrying notes or granting equity. You could borrow some money in a note, you should write a convertible note, you could issue warrants. Some combination.
My hunch is that at the rate any reasonable person would require for a pure loan with no conversion option, the payment would be too high to not stifle your business’s growth. But I have no idea what your business is either…