Entrepreneurship & Small Business

Someone wants to invest in my company - now what?

  • Last Updated:
  • Dec 15th, 2009 8:08 am
Newbie
Nov 1, 2006
10 posts

Someone wants to invest in my company - now what?

I've recently incorporated a new business with a partner and after telling a family friend about the new venture they offered to invest in us.

This came as a surprise, because we hadn't even considered investors and have so far been financing the operation ourselves.

Being relatively new to business, I'm not sure exactly how it would work if someone were to invest in us. What can we offer in return? Would it simply be a matter of saying, "in exchange for your investment of $X, we will offer you a return of %x in such and such an an amount of time after we become profitable"?

What have others done in similar situations?

Thanks for looking,
Cam
6 replies
Deal Expert
May 17, 2008
15134 posts
152 upvotes
camfrye wrote:
Dec 13th, 2009 10:32 pm
I've recently incorporated a new business with a partner and after telling a family friend about the new venture they offered to invest in us.

This came as a surprise, because we hadn't even considered investors and have so far been financing the operation ourselves.

Being relatively new to business, I'm not sure exactly how it would work if someone were to invest in us. What can we offer in return? Would it simply be a matter of saying, "in exchange for your investment of $X, we will offer you a return of %x in such and such an an amount of time after we become profitable"?

What have others done in similar situations?

Thanks for looking,
Cam
There are numerous ways to structure the deal. It could be royalties(which can take many forms, i.e. % of gross, % of net, fixed period of time vs. perpetual, etc), it could be an equity stake in the company, possibly with some sort of dividend structure.

You need to ask yourself if you actually need this investment. You said you were not even thinking about finding an investor, so will the investment provide you with any reward worth giving up part of your profits or equity?
Deal Fanatic
User avatar
Aug 16, 2007
6684 posts
503 upvotes
Toronto
I have had many requests for investment in a few projects, but I am selective on them based on the value they bring me.

Money is easy to get (family/friends/bank), but I want someone that can bring value to my business (i.e. an investor with great contacts, with operations experience, with supply connections, etc.)

Ask yourself if just "having money" is really worth it. If you could get a LOC at 6%, or an investor at 6.5% who brought something else to your business then I know what I'd pick.
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
Two choices: debt or equity.

1/ Debt is borrowing money to be repaid at a specified time with some sort of premium. Born Ruff gave you a number of suggestions as to how that premium would be calculated. With debt, you must meet the obligations of the loan agreement regardless of how well your business is doing. You can be making a billion and all you need to do is give back the money with some paltry interest amount. The downside is if your business is making very little you still have to pay back the debt + interest amount. So if you can use the money you may want to borrow some of these peoples money.

2/ Equity is selling some of the shares of your company for an agreed upon price. The upside is you get the money now and they participate in the future outcome of the business. If you go broke you don't owe them anything. The downside is if you make a billion they get their percentage of it.
Deal Expert
May 17, 2008
15134 posts
152 upvotes
Just Confused wrote:
Dec 14th, 2009 6:42 pm
Two choices: debt or equity.

1/ Debt is borrowing money to be repaid at a specified time with some sort of premium. Born Ruff gave you a number of suggestions as to how that premium would be calculated. With debt, you must meet the obligations of the loan agreement regardless of how well your business is doing. You can be making a billion and all you need to do is give back the money with some paltry interest amount. The downside is if your business is making very little you still have to pay back the debt + interest amount. So if you can use the money you may want to borrow some of these peoples money.

2/ Equity is selling some of the shares of your company for an agreed upon price. The upside is you get the money now and they participate in the future outcome of the business. If you go broke you don't owe them anything. The downside is if you make a billion they get their percentage of it.
Well, what I was describing was royalties, not debt. What you can do is rather than set it up so that they get a % of your equity, you could sell them instead a % of your profits/gross revenues, w/e. This could be in perpetuity, or for a set amount of time. The % can change at different thresholds as well(i.e. 10% until the investment is paid back, and then 5% after).

In reality, these are an infinite number of ways to structure a deal like this. We have not even gotten into issues of control of the company(are the investors partners with you, i.e. you need to make decisions with them, do they have a right to refusal, or are they just silent partners? etc etc etc). Even without a controlling share of the company, the investors could demand certain rights to control.

Make sure you get any agreement looked over by a lawyer so that you fully understand the implications of the deal.
[OP]
Newbie
Nov 1, 2006
10 posts
Thanks for everyone's replies. Much appreciated.
Jr. Member
Apr 10, 2003
121 posts
4 upvotes
There are a number of ways to structure a deal. You have to think how it will benefit you. What do you need the cash for? If it is a short term need, use a bank loan instead. Usually investors want an equity stake in a company for their money. The equity stake percentage is negotiated based on the value of your company. The investor may also get voting rights and may team up with partner to out vote you on some issues - be careful and talk to a lawyer.
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