Need Advise: Investment Proposal

**a764** · 01-22-2008 09:32 AM

I am in the midst of launching my own hair care products, and have drafted an investment agreement for potential investors. Upon reading the draft, kindly advise if this agreement is remotely interesting to 'would be' investors in my business venture. Any suggestions in making it more financially appropriate would be highly appreciated.

The draft:

Zodiac concept:
Being private, Zodiac doesn’t get much media attention, and of course, we can do without it! Yet there is another side to this story. The little-discussed heart of the matter:

Zodiac’s private equity fund will raise money from investors with the aim of investing for the long term in the potentially high-growth sector of the hair care industry, by being a key contender in the industry. We will be manufacturing and marketing our products through our existing network of distributors nationally and overseas.

How our private equity funding works:
Investors in the Zodiac’s private equity fund will be termed as ‘Limited Partners’. The investors have a limited liability; hence, the risk will always be minimal to the amount invested. Each investor will participate in a fixed annual fee of US$ 1000.00 to cover the business operating cost.

All investment funds will have a fixed return of 15 percent on their investment (ROE). Upon receiving the original investment back, Zodiac will retain 20 percent of the net earnings hence after. Therefore, if the original investment by the limited partner was five thousand dollars, and Zodiac made that into twenty thousand over the life of the investment, Zodiac will retain three thousand dollars - 20 percent of the fifteen thousand dollar gain, to be applied towards expansion of the core business.

The return of equity is based on the accounting valuation similar to return of investment (ROI). Because the numerator (Net Income) is an unreliable corporate performance measurement, the outcome of the formula for (ROE) must also be unreliable to determine success or corporate value.

Formula: Return on equity calculation;
(Net Income / Book Value of Shareholders' Equity = ROE)

Apart from this, (ROE) is sensitive to leverage: assuming that proceeds from debt financing can be invested at a return greater than the borrowing rate; (ROE) will increase with greater amounts of leverage.