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Old 10-19-2013, 02:50 PM
 
Location: North Texas
24,571 posts, read 35,197,039 times
Reputation: 28455

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Some friends of mine want to start a business but they don't have money to do so. They don't qualify for a small business loan. A friend of theirs has offered to invest $50k but wants a 50% "ownership" in the company.

He wants to be paid a set amount each month, which would increase if the business became more profitable; he also wants 50% of the proceeds if the business is ever sold. I don't know what would happen if the business failed before his $50k was paid back in these monthly "dividends". He calls himself a "limited partner".

My friends are concerned that 50% is too much, but this fellow is very firm that he wants 50%.

Is this fair? This business has the potential to do a few million in revenue per year.
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Old 10-19-2013, 03:52 PM
 
529 posts, read 640,116 times
Reputation: 274
Unless they can find other Angeles, ==> Beggars can't be choosers.
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Old 10-19-2013, 03:54 PM
 
Location: North Texas
24,571 posts, read 35,197,039 times
Reputation: 28455
Quote:
Originally Posted by k81689 View Post
Unless they can find other Angeles, ==> Beggars can't be choosers.
That was kind of my take on it, but I wanted to know if people here thought that was fair or typical. They asked me, but I have no idea since my degree is not in business and I don't have any experience in private equity.
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Old 10-20-2013, 06:36 AM
 
Location: Baltimore
1,759 posts, read 4,645,526 times
Reputation: 1195
Your friend has no equity in the deal... 50% is almost generous. He wants to be a limited partner so he also doesn't get sued if your friend does something wrong.
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Old 10-20-2013, 09:56 AM
 
Location: North Idaho
25,409 posts, read 33,373,893 times
Reputation: 52541
If this is the best offer they can generate, their idea is not as good as they think it is.

No amount of "good idea" will make a business a success. Unless there is a lot of experience with running a business, or the money to hire the experience, the business will not succeed.

Even with the $50,000 investor, I suspect that the business is way too underfunded.
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Old 10-20-2013, 10:40 AM
 
Location: The Triad (NC)
31,187 posts, read 68,310,790 times
Reputation: 37048
Quote:
Originally Posted by BigDGeek View Post
Some friends of mine want to start a business but they don't have money to do so.
What do they need money for? Inventory? Equipment? Shop/Office Rent? Salaries?
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Old 10-20-2013, 04:31 PM
 
4,399 posts, read 9,571,466 times
Reputation: 2363
Quote:
Originally Posted by BigDGeek View Post
Some friends of mine want to start a business but they don't have money to do so. They don't qualify for a small business loan. A friend of theirs has offered to invest $50k but wants a 50% "ownership" in the company.

He wants to be paid a set amount each month, which would increase if the business became more profitable; he also wants 50% of the proceeds if the business is ever sold. I don't know what would happen if the business failed before his $50k was paid back in these monthly "dividends". He calls himself a "limited partner".

My friends are concerned that 50% is too much, but this fellow is very firm that he wants 50%.

Is this fair? This business has the potential to do a few million in revenue per year.
What is meant by set amount? Set % of profits or something similiar? If not what happens before the company makes enough to pay dividends? But at first glance this seems like a bad deal. Have they looked for other investors?
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Old 10-24-2013, 09:29 AM
 
Location: Atlanta (Finally on 4-1-17)
1,850 posts, read 2,601,502 times
Reputation: 2581
With $50K, you can use that money as a down payment to buy a cash flow business that's already established. Use the cash flow to pay back the investor and service the debt from the purchase, than after he's taken care of use the cash flow to fund your other business.

I'd never get involved with anyone that wanted 50% equity. Even experienced investors don't ask for that much. Do you think the founding funders of Facebook asked and received 50% equity? Not even close. YOU make it clear in your proposal, They're only a cash investor, a silent partner. They will be paid a principal plus the agreed upon ROI. That's all. Make it clear to them that the business could fail and they could lose money.

It's takes about a 60 page prospectus to spell it all out. 57 of those pages are about the risk involved. Please see a securities lawyer before you accept or solicit people for money. That alone will save you time and legal troubles down the road.

They would have no say so whatsoever in any of the business dealings.

Only a fool would ask for that and only a fool would accept it.


50% of this, 50% of that..........that's laughable.

Last edited by Rocco Barbosa; 10-24-2013 at 09:44 AM..
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Old 10-27-2013, 09:08 AM
 
Location: Vallejo
15,810 posts, read 17,789,314 times
Reputation: 14253
Quote:
Originally Posted by BigDGeek View Post
Some friends of mine want to start a business but they don't have money to do so. They don't qualify for a small business loan. A friend of theirs has offered to invest $50k but wants a 50% "ownership" in the company.

He wants to be paid a set amount each month, which would increase if the business became more profitable; he also wants 50% of the proceeds if the business is ever sold. I don't know what would happen if the business failed before his $50k was paid back in these monthly "dividends". He calls himself a "limited partner".

My friends are concerned that 50% is too much, but this fellow is very firm that he wants 50%.

Is this fair? This business has the potential to do a few million in revenue per year.
Absolutely.

The majority of businesses do fail, so the angel investor will be out the $50k or at least a very large portion of it. His money, his conditions. Don't like it, go elsewhere.
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Old 11-08-2013, 04:14 AM
 
Location: San Francisco
48 posts, read 97,295 times
Reputation: 27
Quote:
Originally Posted by oregonwoodsmoke View Post
If this is the best offer they can generate, their idea is not as good as they think it is.

No amount of "good idea" will make a business a success. Unless there is a lot of experience with running a business, or the money to hire the experience, the business will not succeed.

Even with the $50,000 investor, I suspect that the business is way too underfunded.
He is actually right you can't say that this amount will save your company or make it successful. Experience plays a major role in making your business successful or failure.
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