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Thread: Business Investment

  1. #1

    Default Business Investment

    This is my first post, so here's a little back story on my ordeal. I have a full time job (independent contractor, my own LLC) where I make better than average money for a 27 year old in the hunting and adventure industry (six figures). About 4 years ago, I started a side business/company, it was a small clothing line. I went after it relatively hard in my spare time for about a year, then my wife got pregnant, and we had our son ... I soon ran out of time to do anything with my small side business, so it went on the back burner and I continued to focus on my full time job because that is what pays the bills.

    Last year, a friend of mine who had been interested in the company approached me about taking it over. Keep in mind, I have not done anything with this idea for the last two or so years. My friend, his wife, and his father in law asked to take over the business, and essentially make me a silent partner, I retained 10% of the company, I no longer had to do any work, and we had an agreement that I would no longer have to put up capital unless I chose too. If they do well, I get a check every year, if they don't do well, I'm in the exact same spot I was in before with a business that I was not planning on moving forward anytime in the near future.

    They are getting closer to the launch in April, they have sold some merchandise, and have more merchandise ordered or being designed. My friend who is running the company now, is looking for more capital to pay for orders and set up future orders, he is expecting it to sell well. He approached me about investing more into the company.

    I offered him three options: 1) The more money I invest, the more my percentage of ownership goes up 2) I make a set investment, and receive a portion of the profit for each piece of merchandise sold until I am paid back in full 3) Supply a loan to the company and have a set date where I will need to be paid back in full, if paid back in full, I will allow it to be a 0% interest loan (probably not a great business move for me, but I'm not looking to make money, just help), if it is not paid back in full by the agreed upon date, I will then charge a low interest rate (2.5% - 5%).

    He has not replied yet, this was just sent over about an hour ago, so I'm sure he is weighing his options right now.

    Here's the questions ... Are all of those options realistic/fair? Does anyone on this forum have any other advice?

    Thanks.

  2. #2
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    Can your 10% be diluted if they sell shared of their business to someone else in order to raise the capital they need?

    I think they might need to figure out how to get a revolving line of credit going to buy inventory to resell. It's not like the average person can buy $30,000 worth of inventory on credit card to sell. Banks can sometimes help with that, or he'll need to find an angel investor like yourself to fund what they need. And what they likely need isn't a one-shot infusion of cash, but a line of credit they can draw down as they need and refill as their orders come in. I think offering this with a reasonable interest rate (somewhere around 5-6% is likely better than anything they will find right now) might turn out to be a better match for their needs.

    On the other hand, if I'm guessing wrong, the options you've offered are fine and no reason for them to consider you a jerk or anything for offering what you did.

  3. #3

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    Thanks for the response.

    My 10% can't be diluted unless I refuse to buy more capital. I have the first right of refusal if a percentage of the company is put up for sale.

  4. #4
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    Is that what they're doing here with this request to you or...? Seems like they weren't, that it was a request for short-term operating capital, not a request for longer term financing for expansion.

  5. #5

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    That's not what they were requesting, I just offered that as an option. It was only for short term capital.

    I honestly think they were hoping I would just offer some cash up, with no plans for repayment to me. If the company was thriving and I was receiving a check already, I might consider that (just out of appreciation of them bringing my original concept to a successful business), but at this early stage, I'm not going to throw any significant amount of money at a business that hasn't proven anything yet.

  6. #6

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    If I were you, I would not give my money away for free unless you REALLY want to. The loan for 0% interest would result in losing money (depending on the time on the loan) due to inflation, so consider an interest rate that matches inflation at the very least. If you just give them money without repayment (if you were already recovering checks,as you stated) would result in you risking money with no added benefit above your 10%. Go with an option that will at least get your money back (inflation accounted for).
    Kyle Johnston - Founder of KRJ Interactive, an innovative business idea development group. We guide individuals and small businesses toward success.
    www.krjinteractive.com

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