Someone wanted to invest 30k into my landscape company for 5% return, now I’m not the smartest guy out there and someone is free to correct me if I’m wrong but shouldn’t that 5% be until the loan is paid off and not until I give the company up
Again I’m very new to this so I could be looking at this horribly wrong
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Lots of good comments. I would add, in case it’s not obvious, don’t do it unless $30k is going to make one heck of an impact.
That would be a $30k loan. He wants to do an equity investment. Meaning he doesn’t expect the $30k to be repaid like a loan, but rather to be paid out 5% dividends of the profits, and also to be able to sell that 5% to another investor, if you guys get aquired or whatever.
A $30k loan would expect regular payments and interest.
Aside from that, there are a plethora of ways to structure deals, and that is for you two to negotiate.
Not necessarily a question for the op, but why would someone want to buy such a small percentage of a small company? There’s no ownership on it
You are wrong. Investors see potential growth for next 3-5 years and invest accordingly. They also help to scaleup operations with their network. You should see SharkTank to understand more about investing in companies.
There is a lot of good advice here but also a lot of guesswork.
You need to get a clearer idea of what he is offering. What you have now is a messy high-level concept that a lot of people have interpreted.
From my read, this could be a simple offer of $30k for 5% of the business and hence 5% of any dividends. This would seem to be a terrible deal for the investor and I doubt that is the offer.
It could also be equity with a royalty (which sounds like a bad deal for you), equity with a profit share (which could be ok in some cases) or a preferred share structure.
I think you need to:
- understand the meaning of equity and debt and understand the differences between revenue, profit and dividends.
- get him to write out the idea in at least one paragraph or 3-5 bullet points
- post here again
Going merely off of what you stated:
They want an equity stake in your company, you would own 95% and they would own 5%. They have also valued your company at $600,000. If you take their money you wouldn’t owe them anything but they would be part owner of your company though you would retain full control.
Do you believe your company is worth $600,000? Do you need the $30,000? If you feel your company isn’t worth $600,000 then this might be a good deal. If you need the $30,000 to help you expand then this might be a good deal.
If your company is worth more than $600,000 then it’s probably a bad deal and if you do not need the $30,000 for any reason then it is a bad deal.
Just curious, you seem to know your stuff, would the investor be entitled to profits? Would 5% stake automatically entitle them to 5% of profit?
Or does the investor only make money if the business is sold and he earns out more than he put in? This type of arrangement has always confused me for small companies like this
They are entitled to 5% of dividends. If OP owns 95% of the company, he decides whether the company pays out any dividends so finally it’s up to OP. But all of these matters should be clarified before they sign any documents.
It entitles them to x% of earnings attributable to shareholders which is technically different from operating profit, assuming that is what you meant by profit.
As others have answered, yes. The investor only makes money when the business does and what I haven’t seen anyone mention is, depending on how the business is structured, partnership/llc/s-corp/c-corp the investor can share in liability should the company get sued or the company is forced to declare bankruptcy.
There’s a lot to it and it all depends on how the company is structured and operated and even how the ownership is setup assuming they have a lawyer draw up the contract.
If any owner takes a draw, all owners are entitled to a draw.
It’s not necessary that they would retain full control. It’s atypical but the investor could ask for a new super voting share class to be created giving them say 25 votes per share. Then the entrepreneur would keep the majority stake but lose the controlling interest. My advice: look at the term sheet Carefully! Also is your business really worth 600k given the future value of your cash flows? Make sure you get a fair deal :)
I think he is better served by hiring his own lawyer to advise him if he is given a contract drawn up the investor.
It would cost over $2k to have a lawyer review a $30k equity deal
I’m not one to get an attorney over most business matters, but selling equity is one that calls for an attorney 100% of the time.
Just to piggy back on your answer with another question. If he does sell 5% for 30k he has no obligation to buy it back, correct?
Usually, yes.
However there could be contingencies written into a contract which could require him to buy the stake back. That’s why anyone selling a stake in their business needs to have a lawyer review any contract they are presented with.
That’s what I was thinking. I had it as part of my question, but figured I’d keep it simple.
Thanks for the answer!
Great comment.
Keep in mind also that if they own 5% of the company, they are entitled to 5% of the year end profits. Any owner distributions have to be split 95/5.
He’s saying your company is worth $600,000 and he wants to own 5% of it. When you sell he’ll get 5% of the proceeds. If the company ever distributes money to the owners he’ll get 5%.
Very few landscaping companies ever get sold
If you have good credit you can open up 0% introductory credit cards to get capital. 5% is a good rate, 0% is better. If they want 5% interest forever I would say no deal, and if they want 5% of your business I would tell them to fly a kite off a high cliff.
That’s exactly what I was thinking haha
5% equity is very different than 5% interest.
If someone wants to buy 5% of your equity for $30,000 that means he/she is valuing your company at $600,000.
5% of $600,000 = $30,000
Buying equity is not a loan. You don’t owe that money back. But you should have a conversation around if your new potential partner is expecting quarterly or annual distributions of profits generated.
This deal doesn’t make any sense at all.
Was his name Mr. WoOnderful? In perpetuity…
If it was until it is paid off, that would be called a loan.
An investor gives you money in exchange for an ownership stake, but you don’t pay him back the cash.
well investment is different from loan, though they can overlap.
if they are investing 30k for 5% they they believe your business is worth 600k in value (they believe if you try to sell your business it will sell for 600k) - if this the route they are offering, they would own 5% of your business, and be entitled to 5% of any dividends you pay to shareholders (if you pay profits to the owners of the business), when you sell, they will be entitled to 5% of whatever the business ends up selling for.
If its a loan - then they might be saying the’ll lend you 30k, and you have to pay back 30k + 5% (1500) - they would not own part of your company.
the third scenario is where they lend you 30k as a loan, but once it reaches a certain point it would convert to equity (i believe called a convertible note, but check as not my area of knowledge)
assuming its equity - you need to determine if 600k is a realistic value for the business, and if you want this person involved in your business, you should speak with a lawyer.
next, you should also consider if you need the 30k, and if there are better alternatives (e.g. borrow from the bank) to get that 30k.
Sounds like pref equity with a 5% coupon or could just be a 5% hurdle. If you need capital but don’t want to be squeezed by interest on bank debt you could structure this as PIK interest so it doesn’t require any service in the interim. Way too little info here to actually know what is being proposed though.
never take the money if you dont need it. equity is always more valuable if you see a realistic long term vision. But, if they can help you grow then its worth it, 10% of a watermelon is better than 100% of a grape.