# Investor Returns



## kikkoman (Oct 30, 2007)

Hey folks,

So I've spent the last hour looking through the forum to see if I could find anything related to this issue. However I really didn't find what I was looking for. So here goes.

I am getting a new company together and will be launching hopefully soon. My question is about finances and the money $$$. I know this has to be an issue of many people here, unless everyone is independtly wealthy. Which I have a feeling is not the case.

There are four people in my company all with very different roles and tasks that we can specialize in. One in business management, one in web design/graphic arts, one in networking/mass communication/sales, and the other being our investor. The investor too has some solid connections with brick and mortor shops, but his real purpose is to be the investor. Initially we have been under the understanding that he is planning to invest around 25K into the business to get it going. Now he seems to be wanting to reel that number back to 10K or so. Which is still a good bit of money, but his incentive is getting 25% of the business in return. And as we need more money beyond the 25K then we would all agree that we would seek outside capital at that time.

I'm sure many people have dealt with investors and finance partners and have some insight into how to deal with this. He is a valuable asset, but for him to be getting nervous now that it is almost go time worries me. I have been trying to get lots of numbers together so he can see, but am having a hard time coming up with a solid number of what things are going to cost in six months. Does anyone have a business growth chart tracking expenses as they grew? If basic business expenses are around the $2000 mark, plus $3000 more for the website, how far will $5K get you with actual t-shirts? I know it depends on the quality and volume and all that, but when did everyone else start feeling the money pinch? 100 orders, 1000 K.

I know these types of questions vary greatly on individual companies and types of shirts ect, but would you all give away 25% of your company if somenone posted up 10K? We are expecting to be able to push this brand pretty hard and from many angles, so the million dollar mark is not completly pie in the sky. 

I am just trying to get discussion going on investors, rates of return, percentages, ect. So far I haven't found it, but I know the info lies within you.

Thanks,

D


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## BoelenPython (Nov 22, 2007)

are you talking 25% return on investment or 25% of profits?


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## rrc62 (Jun 2, 2007)

How many people in the business will be full time? For a new startup with 4 people drawing a salary, equipment and overhead I'd say $10k is a fraction of what you'll need. Your investor is not looking at the business as an investment. Typically an investor would be paid back the principle plus interest. Usually the interest is a little better than what they could do in a high yield mutual fund or some other stock investment. 

The only way he would be entitled to 25% if if he were made an equal partner. It's up to you as to whether $10k and no other contributions is worth an equal share. I would say if his only contribution is money, then he is entitled to a reasonable return on his investment, not a equal share in the business.

In the long run, you'll probably be better off going to a bank. Loaning money is their business. They won't be breathing down your neck every day wanting to know where their money went.


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## RussianLothario (May 23, 2007)

there are several methods to figure out how the expenses grow over the years. The most commonly used one is projected cash flow method. The idea here is simple, estimate how much your sales are going to grow in the next 6 months. Separate your costs into fixed and variable. 

Fixed being those that don't change regardless of production (like rent). Variable costs include labor, materials, and whatever changes with volume. Then you grow variable costs by the increase in sales. So say you think your sales will grow by 30% in the next 6 months. Your variable costs will grow by at least that much. There might be a point where your fixed costs start growing too, like when you need to expand your facility or buy new equipment. 

As far as your investor, 25% is a reasonable return to ask for, considering the risks and such. One thing I would advise you to do is to put everything in writing as soon as possible. Trust me, this is what business is all about. Break everything down and make it clear and have everyone sign it.

best of luck


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## Catbox (Oct 3, 2007)

why don't you get a 10k bank loan...? 25 percent sounds pretty steep
thats more than a credit card...


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## rrc62 (Jun 2, 2007)

The way I read it, the guy is looking for a 25% piece of the business, not a 25% return on his investment. If that's the case, I'd look elsewhere for money. "Investors" who are too close to the day to day operations are a real PIA.


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## darryld (Sep 20, 2007)

sounds like he's not really and investor as much as he is just a guy with some money. usually an investor will want an exit plan right off the bat. ie: i will invest 25,000 in your business but in return i want 12,500 a year for 4 years ( or something like that) and then hes out. investors dont typically want to be involved in the daily management of the company otherwise all they are doing is buying a job.

for him to ask for 25% of the business is poor for him as well. 25% is a big share but not enough to give him any power if he doesnt believe the business is being run properly or whatever. 25% ownership would also mean that he is on the hook for 25% of the debt if the business fails which is something almost any prudent investor would avoid like the plague.


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## kikkoman (Oct 30, 2007)

Thanks for the responses so far. I should clarify a couple of things. One is that he is a loyal friend of the people working, and I guess at this point he is a "guy with some money." However he has more money than any of us are wanting to put in at this point, so he is a neccesity at this stage. Unless of course if we decided not to use him and just found a sole investor and gave him a return on his investment. So would you all give up 25% of your business to someone that intially helped things get rolling, or would you expect them to have deeper pockets and commitment?

And to help things be clear, he is getting 25% of the business. And he is going to be helping out in several ways with things that need to be getting done. 

Hopefully this helps to eleborate some more, but more input is always appreciated. How have others of you paid your investors back? What sort of schedule did you use? X amount after X amount of time, or more of a we'll pay when we pay you? I'm sure others have had all types of investors, from the ones of wheres my money, to why are we doing things this way (everyday).

Thanks,

D 

(California)


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## BoelenPython (Nov 22, 2007)

the way ive always worked things was like this:

investor puts up money, when money comes back in he gets his cash back first, then the profits are split..

now if these other people arent getting paid as employees are are partners, then i would say after he gets his money back everyone goes equal. That is if everyone it equal.

If the the 4 people include you and the investor that makes things an even split, thats fair to me. You guys do more of the work, but he risks the money.

Biggest thing, think about an LLC and at least write up a partnership agreement.. You can search for that online, its a must as even friendships can be lost with business. No matter how much you trust each other, this agreement on paper will let everyone know how things are so no one can be confused and everyone is on same foot.

good luck.


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## rrc62 (Jun 2, 2007)

If he wants to be involved in the business then an even share is probably OK, but that's a hard call without standing in your shoes. If he just wants to invest, then an even share is not good. Lets say he gets his money back in 2 years and splits. Do you really want to paying him 25% of the profits.

Another thing to consider is friends and business are not always a good thing. Personally, I would not take business capital from a friend, not if I valued the friendship anyway.


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## acanvas (Sep 27, 2007)

investors supply cash and expect a % on thier investment. Business partners making equal shares do equal work, 10,000.00 won't last long, 25% for the bare bones beginning is outrageous!
Also if your asking questions like, "or do you just say I'll pay you when I pay you", you honestly have tons to read, research and learn about business. 
If you decide to get your cash from this guy who already popped a surprise of offering 15,000.00 less and expecting potentially 1,000s more in return you should find a GREAT business attorney, spend the cash (supplied by you all evenly) to meet with the attorney several times to hash out details, agreements etc and then have it put in writing w/ all 4 of you signing.
I don't mean to be a downer, I just smell, chaos and financial ruin in your future coming in the usual ways that cause only 3% of new businesses to survive.


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## kikkoman (Oct 30, 2007)

acanvas said:


> investors supply cash and expect a % on thier investment. Business partners making equal shares do equal work, 10,000.00 won't last long, 25% for the bare bones beginning is outrageous!
> Also if your asking questions like, "or do you just say I'll pay you when I pay you", you honestly have tons to read, research and learn about business.
> If you decide to get your cash from this guy who already popped a surprise of offering 15,000.00 less and expecting potentially 1,000s more in return you should find a GREAT business attorney, spend the cash (supplied by you all evenly) to meet with the attorney several times to hash out details, agreements etc and then have it put in writing w/ all 4 of you signing.
> I don't mean to be a downer, I just smell, chaos and financial ruin in your future coming in the usual ways that cause only 3% of new businesses to survive.


 
This situation is probably is little different than most. 

Most situations of an investor are:

You have an outside person that gives you money, expects a return and your done with them. 

Or you have an investor that gets their money back then, they also get a large chunck of the company profits.

Or all the partners involved put up the same amount, and split the profits evenly.

But this situation is one where one person it putting up 10-15K, gets their money back, but is also involved in growing and executing the business. And a 1/4 of the profits in the future. That is why if they are growing themselves with the business, he will be more flexible in waiting on his return. Hence the "get it when you get it," because he will know exactly where the business stands.

The work load cannont be split evenly, because not everyone lives in the same place. Also the partners in the marketing realm have a lot to offer without work and time, but expertise in getting the product marketed. 

So that leaves me doing a good majority of work for the business, but I don't offer money or connections like the other person. But that is okay with me, because I like to have my hands on the details and prefer to delegate as neccessary. 

It seems like a strange strategy, but it a meritage of services/work/connections/money combination. Then we split from that. 

Have no idea where you would get a stat like only "3% of business survive."

My question is has anyone else had a sole investor partner, that has also been invovled in the work process? What and how much did you expect out of them, what about after the money was paid?..... I already know about the agreements, but I am not trying to get feedback on that, but concrete answers that are more than random stats. 

-D-


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## acanvas (Sep 27, 2007)

Have you studied available info from the SBA, that is where you'll find stats on the majority of new businesses failing in the 1st year, the rest but 3% fail w/in the 1st 5. I just happen to like knowing stats because it gives me a clear vision to base my plan onleaving my dreams to motivate my plan not create it. I didn't mean to put you on the defensive, I just have red flags from what I'm reading here but we all have different lives and outcomes, I do wish you well, I just know that the majority of businesses started amongst friends account for the majority of businesses that fail in the 1st year, just more stats. I only speak this honestly with people going into business becouse it is a great and fun dream and the more facts we know and use as guidance the better chance we have of success! We definatly all want that for you!


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## rrc62 (Jun 2, 2007)

The problem is that if he doesn't like the way HIS money is being spent, he'll be a constant thorn in your side. He might be telling you differently right now, but I can almost guarantee that's how it will play out.

You need to make it very clear who is running the business. You can't have 4 CEO's. That doesn't work. If you are running the business then he needs to understand that you decide where the money goes.


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## Catbox (Oct 3, 2007)

I had a guy that was going to lease a gt541 for me... and he still might... 
but after talking to a couple of other friends who own a business... They told me to prepare for when the partnership would fail... and i told them... no,this guy is great and he is blah blah blah... and they said again... prepare for a falling out with the partner... I'm still an optimist though...lol

I guess what i'm trying to say is make sure everything is documented and make sure everyone is absolutely clear on what their role is... 

and document your hours and anything you do for the business... because your effort and hours are equivalent to the cash the investor invests... if things get hairy.... 

Friends are great but business is business... good luck... it sounds like you have a good crew... just remember to laugh and keep things in perspective... CB


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