Thanks for all the helpful replies. I asked because we have a fundamental difference between our opinions on where we should get the money. As of now we have 3 offers on the table. A SBA-Backed loan from a bank with these terms: 250k, 6 yrs lifespan, 30% down and 100k in collateral with a fixed interest. One investor wishes to front 100% of the money for 40% ownership, no buyout, and creative control. Second investor wants to put up the 30% down payment on the banks loan for 10% equity plus creative control. I want the bank simply because we three can put the 80k down, make the monthly dues, and have enough collateral to satisfy their demands...all without sacrificing what I believe in our best asset, creative control and on top of that we own the company out right. They want the investors due to it basically being a no-repayment if we bust, however slicing up that much of our equity to someone who didnt slave away to start this leaves a bad taste in my mouth, on top of giving this guy a major voice in our business leaves me a bit weary. So we are at an impasse and all that good stuff. Any additional comments?
All the loans will come with strings, so "control" covers a lot of waterfront. Giving "creative control" to a passive investor doesn't seem to make sense based on the thumbnail sketch you have given. Hire competent counsel, and make sure you have an exit strategy if you go with the private investors. Make sure you and your partners have a comprehensive agreement in writing as well. If you don't want to hire an attorney, try a free resource like SCORE. www.scorehouston.org [insert legal disclaimer here]
Having been involved with hundreds of startups that have failed or gone nowhere, I think the prudent course is to take the (investor) money no matter how confident you are in the prospects of the business. The proposals both put ~$650K valuation on your business, which is not too shabby in this environment. Personally I'd lean more towards the investment proposal for fronting the down payment as the best compromise between putting up the money yourself vs. getting it all from equity investment (and giving up a large chunk of stock), but it's not clear from your posts where the $100K collateral would be coming from in the compromise scenario. Frankly, if yours is a business that any Joe Blow investor feel they can run (which sounds like the case here), then it's unlikely to be interesting to (reputable) VCs and angels at this stage.
This values your business at $750,000. The loan terms are really not that bad. You didn't mention personal guarantee. I would assume it is required...but you never know. If not, it makes this route much more attactive. This values your business at $625,000. Not entirely clear, but it sounds like you have been unable to achieve a call option, and you are giving up creative control, even though you are only selling 40% of the business. The upside being, you don't owe money to the bank. The question of personal guarantee is the big one here. Also, not entirely clear what the existing $100k of collateral is. That said, here are some things to think about. With the bank option, you could always try and find a middle ground by seeing if that investor is willing to put up a little more equity at the same valuation. Right now he's offered $75k for 10% stake. You could see if he'd be willing to up his investment to $125k, which would put your at 50% leverage. Personal guarantee or not, this reduces your debt liability, and keeps you at the higher valuation ($125k = 16.67% ownership). With either option, you can try and negotiate some hurdle rates of return after which your management group earns into higher equity and/or earns back control. I.e., after a return of capital + 10% compound annual return, the split goes to 70%/30%, after a 20% return it goes to 80%/20%. Without more detail, I'd personally lean towards the bank loan option. It is clearly a bigger "risk", but you have indicate a comfort level with this risk given the current collateral and your repayment capabilities. However, don't be too greedy, having a smaller percentage of something is better than owning 100% of nothing.
As another thread shows, we are only through two episodes of "How to Make it in America" - as we get further into the season I promise to update this thread with ideas as they are revealed to me through the brash, street smart, wisecracking Cam and the brooding, reserved yet ambitious and artistic Ben, and their sometimes touching, sometimes hilarious trials and tribulations of chasing their dreams.
After two pages there are no serious answers. I am not sure what the OP was expecting asking for advice on here. But I do agree with others if you don't know where to look you might have a hard time convincing investors to invest in your business. You will need a pretty comprehensive business plan. The amount of money you are looking for is pretty small so it will not be VC money but most likely Angel Investors. You also need to find angel investors that have a investment portfolio that fits your business model. Try looking here to see if this group can help you. http://vegasvalleyangels.angelgroups.net/ They have connections with other angel investors throughout the country. See if you are lucky enough to get a chance to present. These guys get thousands of business plans. They choose a handful to do a presentation and only end up investing in a few so Good Luck.
Just read the rest of the thread. Yes a loan will also get you started but of course comes with the risk that was mentioned already. Just remember most start ups fail (I believe it is close to almost 9 out of 10 start ups fail after 10 years). The investors I worked with also mentioned for every 10 ideas they choose to invest in only one makes them money .. 2 might break even and the other 7 fail.
Go to the dead sea, steal some potash, and sell it in Canada. You will be rich. Canpotex makes $222M potash sale http://www.cbc.ca/canada/saskatchewan/story/2010/02/19/sk-canpotex-1002.html I also hear Iran is looking for nuclear weapons. I would sell the water to them if you want a billion dollars.
Thank you all for the legit or humorous replies. It is not that any investor believes they can run but this is a very personal (as in dealing with people) business-to-business marketing exchange that has been tested and successful in many major markets but is a fairly brand new concept. Being how it is, the creative control issue I spoke of is mainly how we will build group brand concepts for pods of businesses, but adding another voice to the team cant be that bad of a thing I guess. It is not out of the question to fund it ourselves, however the rationale for an investor/loan was that we can infuse the business with cash-on-hand that we already have when the need arises as to not take out short-term emergency loans if we get backed up. I already operate a successful home remodeling business that works with home owners who wish to sell to fix up their homes before resale, one partner owns a contracting/construction firm (who I use as my contractor), and the other is in the IT field doing web design (no ITT Tech here)...so money and collateral are not problems. Anyways thank you guys, I will definitely keep you all posted as this business comes together, and maybe one day you will partake in this service as it is developed and launched.
