Here's your mission, if you choose to accept it:
- You've borrowed money from friends and family to launch your business.
- Between loans and personal savings and so on, you have $260,000 in.
- You have no remaining savings or anything of much value to sell.
- You haven't got much of a personal credit history, no credit cards, no nothing.
- Your tax returns from the previous two years show (literally) negative adjusted gross income, because your spouse has a self-funded start-up, too.
- Your business is bringing in revenue and has been since launching to customers four months ago, and you have a solidly upward trajectory.
- Your spouse's business is bringing in some income, but not enough to cover all your living expenses and business shortfall.
- You're, realistically, 2-4 months from your business being cash-flow positive/breakeven.
- You have bills due at the end of next week, and not enough cash in the bank to pay them.
- And no, the payees are not willing to be flexible with you. STEEP late fees on the two biggest ones.
- You work about 80 hours a week in and on the business, and have for the last year and a half, because you have no paid staff and run as lean as you possibly can; which means there's not much time for a side hustle to bring in unrelated income either.
- You have the possibility of a Line of Credit, but are not sure how long that process will take.
- And the possibility of a *small* loan from a community lender, but also not sure how long that will take.
- You have a potential investor willing to give you $20,000.
- But he wants 30% equity in the business. Non-voting, but 30%.
- 30% of your LLC distributions, in perpetuity.
- Note: that $20K is still only enough capital to get you through 1-2 more months -- not quite to cash flow positive unless a rabbit jumps out of a hat or you suddenly have a major surge in revenue growth... which is always possible... but can't be counted on.
- You've poked around looking for other possible investors, but don't have any other deals on offer.
- And those bills are due next week.
On the plus side, giving the equity keeps you from taking on additional debt load, which is nice, because you already have a bunch of that. And he doesn't want voting rights or any other control of the business, or to be active in the business in any way.
But on the other hand, that seems like a ridiculously good deal for him and a bit unfair to you.
- A 30% share would, by conservative revenue projections, result in his initial investment being "paid back" by year 4, and in year five, once your initial loans are paid off, he would get somewhere in the neighborhood of $60K a year from then on, so, you know, triple his money back every year. As long as you have the business.
Do you take the deal?
And if not, what WOULD you do?
Just discovered I could edit anonymously, too, to answer some of the questions that have been raised.
Thank you all for your input. Very much appreciated! This has turned out to be a really interesting look at different perspectives.
A couple of additional bits:
• It's a brick-and-mortar business.
• The bulk of the startup costs were the buildout of the space
• I *had* enough in the initial funds to provide for buildout + a solid six months of operating capital, until some last minute construction curveballs wiped out more than half of the operating capital budget.
• The landlord provided almost no tenant improvement money because it is a new business and I am a new entrepreneur. We got a REALLY good rent deal - so we more than recoup the initial buildout cost over the five year lease - they just weren't willing to risk *their* capital upfront. Which I get.
• The fixed monthly operating costs and bills with fairly-steep late fees are things like rent, utilities, etc.
• The initial loans from family/friends will be paid off in 4.5 more years, at which point, our cash flow picture changes quite a bit.
• Not presently taking a salary or any money from the business at all; about $20K from the initial money has gone toward living expenses over the past year.
• The working hours are rather essential; we *have* to be open, and since it's a new business and my baby, I feel it's important for me to be the one doing the hands-on interactions with customers; at least most of the time - plus, as a new business owner, while I have help (bartered for) with accounting and bookkeeping and marketing and some staffing and so on, I'm still learning and growing and shaping policies and procedures and All of the Things.
• But I am working on additional revenue-generating activities within the business that will help; and hopefully soon!
• And the potential investor rejected offers like a convertible loan, or step-down in percentage after a certain amount of return, etc. - he believes it's going to be a big company and he wants that share of it when it is. While I appreciate the vote of confidence… still feeling a bit not-great about it. If I'm giving equity, I really would prefer it be to someone who brings more than cash to the table.
But I also didn't realize that the LLC could vote to not distribute funds! Extra thanks to you Paul Bostwick. Neither my lawyer nor my accountant mentioned that. Because THAT helps a bit. I thought it was a given, and as a result, I was worried about my ability to reinvest in the business or to expand.
Anyway: thank you all.
Really educational to read all of your input.