How does this sound to an investor?

ChristianChristian Posts: 2subscriber
edited November 2006 in Startup Funding
Please give input on the following proposal:
Loan size of $300K.  Manufacturing company 9 months in business with increasing sales trend.  Plenty of projects in the pipeline.
Terms:  2 years payback on investment, 12% annual ROI, 15% non-voting ownership on company, first payment after 90 days on a quarterly basis. 
Opinions please.  Thank you.

Comments

  • ChristianChristian Posts: 2subscriber
    By the way, I am not asking for an investment, just an opinion. 
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    Quick points:
    1. You will need to show/demonstrate that the business can service the debt, which means you`ll have enough cash flow after only 90 days to make the payments!!!
    2. If you can service the debt - then you may not need to include the equity.
    3. If you include non-voting equity in the deal, you`ll have some liquidity event - so they can get their cash.
     
    Robert Johnson
  • DeafCeoDeafCeo Posts: 3subscriber
    What is a non-voting equity?
  • InactiveMemberInactiveMember Posts: 12subscriber
    The "non-voting ownership" sounds terrible to investors. The figure of 15% for $300k gives your business a valuation of $2,000,000. Do you think that`s realistic? I don`t know if it is or not. I think that the non-voting-ownership is really going to rub investors the wrong way. You should read a book on venture capital, if you haven`t already. I cannot think of any investor who would part with $300,000 without at least some control. Also familiarize yourself with valuation. I do however like the shortness and clarity of your pitch. Excellent job in that respect.
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    CookieMonster,
    While your math is accurate- remember that Christian said he was looking for a loan of $300K with a 2 year payback. I gather that the ownership was intended to be a "kicker" on the deal - in which case it would be customary for that to be non-voting.
    Since he is talking about a loan - he will need show that the company will be able to service the debt. For example, the monthly payments would be about $14.000 per month. A hefty amount for a growing business.
    Robert Johnson
  • InactiveMemberInactiveMember Posts: 12subscriber
    If it`s a loan collateralized with 15% of the company, then the topic of valuation will certainly arise. Heck, the topic of valuation is going to arise pretty much no matter what. This isn`t a $3000 or even $30,000 loan. Any investor worth his or her salt is going to think at least once or twice about whether or not the company is worth the $2,000,000 implied by a $300k loan for 15% of the company. It`s just basic math and basic common sense.
    Second, I have strong doubts that many investors are going to make a $300k investment without receiving any say so in operations. It`s just not common sense either. In any event, even with the return of the stock when the loan is repaid, most investors are going to think about what could happen in that 2 year period. I think a $30,000 or even $50,000 loan is possible without any voting stock, but $300,000 and perhaps no hard assets for collateral. I doubt it.
    And at the end of the day, asking an investor for a $300,000 loan with no voting stock is a bit like saying, "thanks for the $300,000 now keep your nose out of it". And that certainly does sound terrible. There are a lot of venture capital and seed capital deals cut for $300,000 and a hefty amount of stock changes hands.
  • InactiveMemberInactiveMember Posts: 12subscriber
    I heartily agree! The real problem is that the deal is structured like an investment but he wants it to be a loan. It should be one or the other.
  • InactiveMemberInactiveMember Posts: 12subscriber
    One other note. I don`t have enough information about the business to have any idea about what it`s worth. That said, the $2,000,000 valuation will certainly be a sticking point. My instincts tell me that any  investor who ponies up $300,000 wants 30 percent for the risk. I feel pretty comfortable saying that $300,000 for 15% is not going to fly very far unless the fundamentals of the business are rock solid. For a $2,000,000 valuation, the business is going to need serious assets, outstanding cash flow, and experienced management. Maybe this is the case. Maybe not. Valuation is always the stickiest part of this kind of deal. The investor always wants a smaller valuation; the entrepreneur always wants a larger valuation. Unfortunately for the entrepreneur, the investor can generally walk away from any deal without any consequence beyond lost opportunity.
  • DeafCeoDeafCeo Posts: 3subscriber
    I know valuation is how much a business is worth. Is that right?
    Also is valuation determine by assets/cash flow and how much management is getting compensate to run the company?
     
    Cookiemonster can you suggest a good book on venture capital? More on the level of a VENTURE CAPITAL FOR BEGINNERS/DUMMIES concept?
  • InactiveMemberInactiveMember Posts: 12subscriber
    There`s a great book but I don`t remember its title. I plan on going to the library tomorrow and I`ll find its title and pass it along.
    1. Valuation metrics. There are numerous formulas. Valuation can include cash flow, assets, etc. Customer lists, existing contracts, all that stuff. Try googling valuation.
    2. Valuation is the process of determining what anything is worth. How do you value a car? Kelly Blue Book for example. How do you value a house? Valuation is always a tricky matter in any transaction where price isn`t necessarily fixed.
    3. Valuation is generally speculative, possibly art and science, not just science. I don`t know very much about valuation beyond the basics.
  • InactiveMemberInactiveMember Posts: 12subscriber
    Venture capitalists are more or less concerned with three things. 1] The size of the market and your plan to get massive market share and huge revenue. Enormous liquid markets are best. New categories are even better. 2.] The management team.  3.] The exit. It`s the part where they make money.
    This is what a venture capitalist wants to hear:
    The market for this category of healthy and beauty products is $5 billion annually. Our product is patented and has already seen widespread acceptance in our local market. With additional capital we can achieve $1 billion in sales within five years. Once our market share reaches 20 percent, we will be an ideal acquisition target.
    This is what a venture capitalist does not want to hear or find out:
    The market for healthy and beauty is $50 billion annually. Our product faces entrenched competitors that have prevented us from gaining marketshare. With additional capital we can achieve $10 million in sales within five years. We can succeed if we only get 2% of the market. CookieMonster2006-11-1 15:46:51
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member

    Questions:
    Also, if I am asking for $200,000 minimum and $500,000 and part of the plan is to give the VC firm a percentage of ownership (40%) and voting rights, as well as the right to make personnel and general recommendations, will that be enticing to them, even if my plan doesn`t have fancy graphics?
     

    Katherine,
    1. Your business may be a bit early stage for traditional VC firms - so you may have to look for alternatives.
    2. I really hate to see you sell so much of the business for such a realtively small amount of capital.
    Robert Johnson
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