A local restaurant is building a new location, and is looking for “angel” investors.
They want $10,000 and supposedly will return a 10%/year interest rate.
The agreement I have been shown is really sparse. For example, the only penalty mentioned is that of non-payment, and the recourse is that the principal will bear interest “at the maximum legal rate” until paid.
I’m not opposed to making a risky investment, but I’d like to protect myself as much as possible. For example, I’d like to be at the head of the line if they declare bankruptcy.
As written, you’d be an unsecured creditor in bankruptcy. To be otherwise, you’d need to perfect a security interest in an unencumbered asset owned by the debtor. I doubt they have any unencumbered assets. If they did, they’d be getting a loan from a bank.
And yes, if you decide to go forward with this, get a lawyer to draft an agreement/documents needed to perfect a security interest, etc.
“For example, I’d like to be at the head of the line if they declare bankruptcy.”
being an “angel investor” and being at the head of the line (a secured creditor) are mutually incompatible----almost by definition.
as the above noted, the restaurant likely as no assets; otherwise the restaurant wouldn’t need angel investors.
you could get your loan secured by something like kitchen equipment at the restaurant’s other locations.
but you’d need an attorney as the law re. security interests in property vary from state to state. or ask google to get a basic gist of what the law is in your state so you know what questions to ask a lawyer.
as an aside, restaurants are an awful business to invest in. so do your homework and don’t risk anything more than you are prepared to completely lose.
Seconding CCcc’s comments - restaurants are one of the highest-failure businesses and take more hard, long work to maintain success than almost any other kind of business. Slack off for a week, and the bad reviews will kill you.
Invest only money you can completely afford to lose - if you wouldn’t stack it on red at a roulette table, you aren’t willing to take the risk a restaurant run by third parties represents.
Don’t get a lawyer, just walk away. I’m sorry, a restaurant isn’t going to give you a thousand dollars for lending you 10,000. That’s just not happening. Why would they get a loan from you at 10% when they could get it from a bank at half that? Because it BS? Because they’re never going to return it? Because the bank won’t give them a loan?
If you get a lawyer, you also need a CPA to look over the books and tax returns from their first restaurant…my money says it’s a money pit.
This just screams ponzi scheme to me.
If you want a risky investment, go toss your money in the stock market not some bozos that are asking for money on craig’s list.
Here’s another question. If they’re doing so well that they want/need to open a second location, why are they asking the general public for money. There’s nothing good about this deal.
Walk away.
There’s a time and a place to lend money (even if it’s risky) to a start up, this isn’t it. IMO.
I would bet more on wishful thinking and the notion that individual investors would be easier to find and less demanding than bank money.
And you have to think that one through: if the owners aren’t confident, organized and wise enough to go to a bank, then they’re not confident enough to represent a worthwhile investment.
Maybe, but the OP said this would be their second restaurant so they should already have dealings with banks which tells me they can’t get money from one and know that 10% is an awfully big number.
To put another scenario out there, it’s possible (not likely, but possible) they’re setting this second restaurant up as a shill company. It’ll accept all these loans, go bankrupt and no one will get paid back. They can then use the money to pay back loans on the first restaurant and bankrupt that one as well (which is probably a sole proprietorship and not an LLC).
If the OP knows anyone in the restaurant industry, restaurant owners, bar managers, sales reps for food service companies or wine/beer distributors, talk to them. They tend to know a lot of the behind the scenes stuff.
I wouldn’t argue any of that - if the investment isn’t 100% legitimate, there are endless ways it could be a scheme to bilk investors to one degree or another. But Occam’s Razor, based on what’s been said so far, is that it’s another business trying to get money fast with as few strings as possible for what they believe are legitimate ends. Such entities look with longing on the great days of Venture Capital, when individuals and small investment groups would drown the most ludicrous and improbable opportunity with mountains of cash and no recourse.
FWIW, I don’t think that they are out to deliberately cheat anyone.
This is a well-know, single-location restaurant that has been in operation for at least 30 years.
They are a (relatively) high-end, “foodie” establishment. I believe that their current location is being demolished for redevelopment, so they decided to build a new location from scratch.
I’m not sure why they didn’t get a bank loan.
And, I’m also aware that if they were great with money, they would be bankers and not restaurateurs.
Just to add another thing that bugs me, if their current location were being demolished for redevelopment, it should have been bought out from them. Now, I have a friend with a well established dental business who had that happen to him and they offered him almost nothing when they tore down his place. He negotiated a better price, but I think he would have preferred to stay where he was. Either way, he had some seed money for the new place.
I dunno, I don’t like it.
Like I said earlier, if you know anyone in the restaurant industry, a friend that’s a chef, an uncle that works for Sysco or reps or MillerCoors, see if you can put some feelers out. You’d be surprised at how much those guys all talk.
Even if everything is 100% on the up and up, restaurants are just very difficult. Let’s start with the location. Where are they moving to, is it in a former restaurant’s building? Have three restaurants already moved in and out? That’s the kiss of death already, stay away.
That’s hard to say. Like you said, the dentist was offered “almost nothing.” Maybe they aren’t getting much.
I worked at a restaurant that decided to redevelop after 50 years in business. Instead of just selling their property, they partnered with a developer to sell multi-million dollar homes and rebuild the restaurant, too. After 3-4 years, nothing came of it. I think they had to presell units to build and never sold any. Some of the owners were working menial jobs to get by, and eventually they partnered with a hotel chain.
If they’re throwing a number out there like “10%,” I would run – not walk – the other direction.
They should not be promising – or even estimating – what you will receive based on interest payments of what you’re investing. They should base it on percentage of profit; they should make you a stock holder of sorts.
If I were opening a restaurant and looking for investors, I would get a lawyer and draw up a contract that says something like this: “After your make your initial investment, you will not receive anything until the restaurant makes a profit for 4 contiguous months. Afterwords, and only when the restaurant is operating at a profit, you will receive X% of the profit based on an initial investment of $Z.”
I’d even push back from the other side a bit: 10% isn’t nearly a high enough return for the risks inherent in the restaurant business. The perception of restaurant failure rates is actually higher than the reality (there’s some good evidence that they’re actually one of the less risky kinds of small businesses), but even the very best small business has way too high of an outright failure risk to make investment worth it for a 2% premium over the S&P.
But at too high of an interest rate you’re jut not going to get you’re money because you’re going to put them out of business with your high interest rates or they’re going to stiff you say they can pay some other bills (or they’re just going to find another lender that isn’t a loan shark).
From the borrower’s perspective, absolutely. If you’re a bank or a larger-scale angel investor where this sort of thing is your business and you can appropriately diversify the risk, sure. In this case, presumably as an individual with more limited funds, a 2% higher return with the commensurate increase in risk is unlikely to be part of an optimal portfolio unless the individual investor is extremely (to the point of unwisely or unrealistically) risk-tolerant. I mean, in the end, if you’ve got the 10k to spare and want to do something more interesting, sure, but there are probably better ways to invest.
(This assumes that the investment is the only benefit, of course - it’s not something like investing in your own business where you’d getting the freedom and satisfaction of doing what you want for yourself every day, or a friends & family investment where you’re getting some other kind of good will. Just a cold, heartless investment!)
Look, if you just want to go and blow $10k, go to Macy’s or Harley Davidson or the Apple Store or whatever floats your boat and buy something nice.
If you want to invest $10k, open up an e-trade account and buy some, uh, AMD @ $3.50 or T (AT&T) at $36? ATT has a nice 5% dividend, just free cash from all those people with $300 cell phone accounts and $200 U-verse plans.
If you just want to give $10k to someone who needs it, donate it to the food bank or homeless shelter.