Does my investor have to give total investment up front?

elsizzle2000elsizzle2000 Posts: 5subscriber
edited April 2007 in Startup Funding
I have an investor who will also be my partner. He has orally agreed to invest 50K in exchange for 49% ownership of co. Well we are getting ready to make out our written agreements & I am not sure if he will be investing 50k up front. He is making it sound like he will pay out the money as we need to pay for things. I am not comfortable with this as the percentage I am offering him is contingent upon the total amount of money he is investing. Also what if he decides that he changes his mind at 25k & wants to pull out.Is it customary for investors to invest a total amount all up front or do they sometimes invest little by little over the course of the start up?I see two options;invest total 50k up front for 49% ORinvest less for less percentage.What is "customary"? What would you suggest in my position?I am meeting with him tomorrow & I just want to be well informed before I make any decisions.Thanks!
elsizzle20002007-4-10 20:8:51

Comments

  • stevesteve Posts: 14subscriber
    Everything is negotiable. How strong is your position? What will you do if he walks?
  • elsizzle2000elsizzle2000 Posts: 5subscriber
    If he walks I seek another investor. I am so confident in my business concept that I have no doubt I would find another investor for sure.So what is the "norm"? Do investors invest in increments or total amount up front?
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    I`d give this a lot of thought before I embarked on an arrangement such as you described.  Consider the following:
    Are you putting any capital into the company at this time?
    Are you comfortable with the valuation  for your business at $102,000?
    Finally, you say you sold 49% - but if you let him pay the "bills" - he has control of the business.
     
  • Innovator7Innovator7 Posts: 9subscriber
    You two agree to exchange 49% of a company for $50K.  If the investor doesn`t sign the check for $50k, he has no right to 49% of the company.  One is exchanged for the other.So if the investor only signs a check for say $10K,he`s entitled to 10% of the company until he signs the next check, etc...AN important question is how much money is needed to really operate the business.  If only 10K is needed, take it and make a good profit, then up the valuation to say 200K.  The next 10K would get only 5% additional percentage of the company, etc...Not knowing what the business is, I`d say 50K for 40% is cheap if the business is really viable.
  • Innovator7Innovator7 Posts: 9subscriber
    I agree with John on the subject of valuation.  My point was about equitable exchange.  It`s a matter of contract.I already said 50k seems to be a small amount for 49%, something I don`t deal with an investor but would use a credit card.for.Yes there`re differences between selling 10% and 49%.  Investors would normally have to pay more than proportionally for higher %, especially for controlling interest.  Personally I won`t sell my controlling interest.
  • elsizzle2000elsizzle2000 Posts: 5subscriber
    what is "Private Placement Memorandum"?
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    PPM`s are generally advisable when you intend to have several investors.
    In most states, "partners" -those investors who will be active in the company are exempt from the securities registration regulations.
    You should have some formal paperwork, however. A stock purchase agreement and buy/sell terms as a minimum.
    Robert Johnson
     
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    what is "Private Placement Memorandum"?
    A "Private placement Memorandum" is a document used for the private sale of "non-registered" securities. It is most often used when the exemption contained in Regulation D rule 506 of the Securities law. When one sells securities- they must either be registered with the SEC or be eligible for an exemption from that requirement . Regulation D offers 3 possible exemptions.
     If you want more detail, send me a PM
    Robert Johnson
  • shabbirahmed01shabbirahmed01 Posts: 0subscriber
    Well the rule of thumb is never say no to money.  The second rule is always continue searching for funds.  If your investor only wants to put in X then give him X and start looking for the Y to complete out your 50k in investment.  Once they see the business flourish you can always as for more from the two sources of capital you have now.
    Also, if the business is doing well then your cost of capital may be far less than the initial 49% give up...
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member

    Well the rule of thumb is never say no to money.  The second rule is always continue searching for funds.  If your investor only wants to put in X then give him X and start looking for the Y to complete out your 50k in investment.  Once they see the business flourish you can always as for more from the two sources of capital you have now.
    Also, if the business is doing well then your cost of capital may be far less than the initial 49% give up...

    I must respectfully disagree with your "rule of thumb is never say no to money".
    If the deal isn`t right for you or the investor isn`t someone you will be comfortable being "married" to for years - then one should say no. Many of the "horror" stories one hears about investors (especially VC firms) would (and should) have been avoided if the entrepreneur had said no to the money. 
  • stevesteve Posts: 14subscriber
    I agree with Robert. Money always comes at a price. Only you can say whether it`s worth it.
  • pagejamespagejames Posts: 1subscriber
    Elsizzle,
    I know this may sound a little simplistic and generalized, but if you are sure you can easily find another investor, then you should be able to negotiate from a postition of strength and come to terms that you are comfortable with.  If you can walk away without his money and find it somewhere else, then you can require full upfront payment for full upfront ownership.  If he won`t do it, then find someone who will. I know this is late, but I hope it all worked out for you.
     
    Good Fortune!
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