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What would you do? Clock's ticking…

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.
So:
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:
o It's a brick-and-mortar business.
o The bulk of the startup costs were the buildout of the space
o 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.
o 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.
o The fixed monthly operating costs and bills with fairly-steep late fees are things like rent, utilities, etc.
o 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.
o 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.
o 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.
o But I am working on additional revenue-generating activities within the business that will help; and hopefully soon!

o 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.


25 Replies

Paul Bostwick
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Paul Bostwick Entrepreneur
Researcher and Self-Employed Product Designer
Two notions come immediately to mind: Factoring. (getting advances on your Accounts Receivable) Offering Terms to your customers for advance payment - Enticing terms as you have a basis for comparison. If you can explain the WHY you can for a short time offer them a deal for this prepayment it might not get them used to the lower price. And it is a challenge to pre-buy service. And a consideration: The Equity purchase offer is pretty tough: But dont figure how much they make (over the coming years) except to figure what other investments this compares to. It sounds like they think your odds are not so good. Do they know something you dont? Vice Versa? Maybe you could counter that you be able to buy it back at some price after a particular point. What keeps the LLC from just not voting to dispense funds to the owners and instead pay Anonymous Member more and more each year? If it was put to a vote I think I know how it would go... -Paul
Camille Leon
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0
Camille Leon Entrepreneur
Founder of the Holistic Chamber of Commerce
I would create a special sales offer, both for current customers who deserve appreciation for getting you this far and for new customers who would be attracted to buy now. Since you seem to have a viable product/service already. Send an email and make some follow-up phone calls or vice versa. Let your social media connections know, too. Good luck!
Seth Caldwell
0
0
Seth Caldwell Entrepreneur
Creator SnapChallenge
Why not get a job, work only 40 hours a week on your business? Show family/friends said job and take a bit of money that you'll pay back immediately when getting first paycheck. Other than that, counter with only giving the investor 10% - it's still more than the 7.7% of which his money represents of the 260k already put in.
Clynton Caines
3
0
Clynton Caines Entrepreneur
SharePoint Developer at Discover Technologies
It sounds like you already know that $20K is really small for the 30%. The thing that gets me is the 'perpetuity'! Beware of shark.

I would prioritize bills and recognize that though they might be due next week, unless the payees are real loan sharks, tacking on some fees might actually be worth it. Have you considered the break even point if you fail to pay for a few months and the fees multiply? Will it then take you 8 months to break even after paying the outstanding bills + fees? If so, that might be a sound strategy - but only you can decide...

A few things to consider: sites like gofundme/kickstarter/prosper.com, credit cards - though they've really tightened up their lending, other potential investors (you might have a story to tell now that you've got an actual term sheet from one). And as others have said, double-down on the the sales side - maybe even bring on a commissions-based salesperson.

In any case, the best advice might be to take a breather before making your next big move. At 80 hours/wk, you likely need some real downtime - a day of ice cream maybe? dinner and a movie? Netflix? No matter what you do, I'm pretty sure the world will continue to spin - and it will do so well past next week....

Good luck
Patty DeDominic
4
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Patty DeDominic Advisor
Chief Catalyst, Managing Partner at DeDominic & Associates (Also Chief Catalyst for Maui Mastermind and Exec Coach)
20k is way too little for 30% of your business maybe 5%??? You can go to kabbage.com or the local community bank and you could finance your accounts receivable. Thank You, Patty De Cell [removed to protect privacy]
Chris Sorensen
1
0
Chris Sorensen Entrepreneur • Advisor
Startup Executive / Mentor, Expert in Innovation and Product-Market Fit, MBA, MS
I like Clynton Caines' perspective and insights.

At the moment, it sounds like you trying to make critical decisions under high stress - which is always very difficult because we tend to go with our gut (which is often driven by fear) rather than our head or our hearts.

Clynton is right - take a breath and have some ice cream and think about your options "coolly" and dispassionately.

"..unless the payees are *real* loan sharks, tacking on some fees might actually be worth it."

Good point.
The fees are likely to be *much* cheaper than giving up 30% of your company and its income in perpetuity.

I would also ask - if you are "willing" (or forced) to give up 30% equity - how might you get more than $20K value for it - even if it is not in cash?

For example one company I know just hired a very experienced salesman who's last salary was way above the company's ability to pay. They sweetened the deal with substantial equity. Now the new VP sales and founders are clearly on the same side of the issues - because their interests are tightly aligned. This is not always the case with an investor.



Michael Feder
3
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Michael Feder Advisor
Founder and CEO at PrayerSpark; Finalist: Global Business & Interfaith Peace Award
Seriously? Have they repossessed your car? Have you been locked out of your home? Has collections come and grabbed your computers? No? You have plenty of time. Focus on the goal, just 2 or 3 months away, as you say. Because if that is true, you have plenty of time. Ignore the static- plenty of businesses have survived much worse than you are in- you won't be laying anyone off, or losing key staff- just damaging your credit while the business ramps up in just 2 months. Right?
Michael Barnathan
1
0
Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
You're probably not going to like this answer: Contract work out or pick up a part-time job and work on the business when you can - that would be less disruptive than establishing a $60k valuation on something you've paid almost $300k for and giving away 1/3 of the company at that valuation, which is a move you won't be able to undo. While entrepreneurs need to be optimistic, an objective assessment of the current state of things is also important. Realistically, you're in a situation where financial issues are presenting ultimata that could kill your company. Stabilize that and firm up your financial foundation while you continue to develop your business (albeit more slowly) and seek investment at better terms as soon as you can. Entrepreneurship is a marathon, not a sprint - pace yourself and keep yourself going for the long haul, even if it means slowing down in the short term.
Andrew Lockley
1
0
Andrew Lockley Advisor
Investor and strategy consultant
Tell him the deal is dumb because it won't allow the business to take on any future investment. If you're credit report isn't affected, tell the creditors you won't be paying them yet and there's nothing they can do about it so they need to be patient. As long as you communicate and stand your ground nobody ever does anything.
Jake Ring
0
0
Jake Ring Advisor
President at dcBLOX Inc.
It's not always a choice between two options. The good thing is your investor believes enough in your business to invest in it, and if you start to perform in four more years (that part is strange, you're 4mos to break even, but 4 yrs to performing enough to kick off enough to cover the $20k? Why so long?), you'll be throwing off enough to pay him back and then some. If ultimately the investor sees your business as some annuity stream, find out from him what return he wants to make over a set period. Do you plan on an exit to realize the returns of your company, or were you planning to live off the annual cash flow of the business? If your investor is reasonable, anything giving >6x cash on cash return is stellar. See if he is willing to cap that so that you can either pay him the expected return and then claw back the equity to a smaller amount where he will see his investment providing ongoing return but as you guaranteed him a return of X for a set number of years he made the bulk of his expected return over 5 years and from then on gets a lower but guaranteed return, maybe a dividend distribution also. Or, you could provide him with the non-voting shares but later issue preferred voting shares to VC or other investors when you need to scale and get better terms. Ultimately, if you need money, and if he is the only avenue you have to get some in time, you still need to negotiate the terms. 30% to save your business and cost of living may actually be pretty good given the circumstances. Thanks, Jake Ring Sent from my iPad
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