Taking out $20k loan for startup costs and I want to offer ownership shares to one investor who’s lending me half ($10k) but need advice on how to structure it please.
I know nothing of what to include, whats a typical percentage and for how long. In case it factors, their loan will be very low rate or interest free, tbd.
Are ownership shares even common for such a low amount loan? Is there an average?
Any advice is helpful. Thx.
It’s very rare to find small startup loans. Typically business ownership is tied to what the business is valued out. So let’s say the company is worth $100k in the first year, a $10k partner buy in would be 10% owner. That said, you need to discuss all of this with a general business attorney.
Congratulations on starting your venture. But make sure to define the terms clearly to avoid issues in future.
Options for you include:
- Convertible Note or SAFE Agreement: So what this does is instead of directly offering ownership shares, you offer convertible note or Simple Agreement for Future Equity (SAFE). These are debt instruments that convert into equity at a later funding round.
Be clear and outline the loan terms, including the principal amount, interest rate (if any), and repayment schedule. Also specify whether the interest is deferred or paid regularly.
Define the ownership percentage tied to the loan and this will vary based on the perceived value of the investment and risk involved in the venture. For a $10k investment, you can offer 5% to 10% ownership.
Determine the valuation of your startup which will help in calculating the ownership percentage. Take help from a professional if necessary.
Have an exit strategy to allow the investor to exit or convert to ownership. This includes details on what triggers a conversion or if there’s an agreed-upon timeline for conversion.
Specify the duration of money which will be is considered a loan before potential conversion. Typical terms might range from 2 to 3 years.
Specify interest rate if any and be clear to comminucate risks and potential rewards associated with the investment.
Ensure the agreement is in writing in a format that both parties understand and sign.
Also suggest and consider other financing options like grants, accelerators, or crowdfunding.
Seek professional advice if necessary.
Incredibly helpful, thank you.
The % will also depend on the value of your business. Its not like there is a standard average, its different for every business. You would want to value it properly so that you are not losing out on the actual value of your business