[bzboy]

Hello everyone... I will be discussing my expansion for my current business with some private investors in the near furture. I have never needed to seek an investor before but since I want to expand and make the sister company a sucess I will need an investor. What should I know when going to talk to an investor to sell my idea? Obviously I will have my current biz plan, but what else can I expect to be asked and what do I need to have in order to be prepared?

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Comprehensive guides can be found on the internet that will be much more informative than the bits and pieces of information...and misinformation...that you could get here. Be prepared, be throrough, and be professional.

[Cole Taylor]

I suggest that before you even begin talking with investors you have a defensible valuation. Something that both you and the investor can agree upon regardless of which valuation method you choose.

Two important things to keep in mind are pre and post money valuations. If your business is worth $500,000 and you need $250,000 do investors get 50% (pre) or 33%(post). Once you have the percentages worked out you can start working on returns. How will your investors be paid? What's your exit? How long?

Assuming your offering equity over debt, (personally I prefer convertible note in the seed stage) is everyone signing a proxy or will they have voting rights? Do you have one series of stock or are the investors demanding series A preferred?

Your goal is to give as little as possible while the investors goal is to get as much as possible both in equity as a percentage of ownership and return.

The more sophisticated the investor the more complicated matters become. For small investments under $1,000,000 I'd do convertible notes in the 15% range on a three year term assuming you can handle the debt service.

[sleighter]

And make sure you use spell check

[Cole Taylor]

Originally Posted by jmenq2

Whoa, whoa, whoa. Slow down, big guy. It's great that you have had experience with investors before, but it looks as though you know just enough terminology to be dangerous, and appear to be throwing it around to show that you know it.

Why dont you just come out and say that you have a complex with anyone who knows more than you. You crack me up mr. troll the YE forums trying to get consulting gigs. You're clearly looking for an argument due to the fact that in another thread you took my telling another poster to be leery of cheap consultants personally. I'm sorry you're cheap and cannot command a higher dollar amount, but from reading your posts I understand why.

You're correct that you need a defendable valuation. However, the issue of how to distribute equity based on a given investment amount with a given valuation is the LAST thing to be concerned with at this point. You haven't even addressed how to GET the valuation. For pure equity, you need to forecast your future cash flows, which will require a very detailed and well researched financial section of your business plan. Then you could use the capital asset pricing model to find your discount rate, though you'll have to estimate your beta by looking at comparable companies. Then, discount the future cash flows back using the discount rate given by the CAPM. If you're using a combination of debt and equity, you'll need to find the weighted average cost of capital. There are several ways to get at it, but you need to get a valuation before you can even address how to determine the equity stake that a given investment should warrant.

perhaps when you recieved that cracker jack box degree of yours reading comprehension wasn't required. My post clearly states that the OP needs to determine a valuation REGARDLESS OF METHOD. Now should I spell out everything in fine detail that'll take up an entire book or just point the person in the right direction. You're really reaching for straws pal.

Again, it's great that you have experience, but you're offering advice without considering that your situation is not exactly like everyone else's. Clearly here you are making the assumption that a corporation is the business entity. For an LLC, for example, you won't be considering these same issues. Instead, the operating agreement will govern, and there will not be shares of stock involved.

You crack me up...this is coming from a guy that dishes out the most generic useless advice ever while trying to pretend like he knows all. I'm confident the few people on here who do know what they're talking about already have your number.

Assumptions are made every day, I'm giving the OP an idea as to how he can achieve his goals. I suppose I should look at every single variable, make no assumptions, and offer generic advice like yourself. Would that make you happy? A corporation is generally preferred over an LLC by sophisticated investors.

Finally, I don't understand this final paragraph at all. Why would a more sophisticated investor make matters more complicated? I don't even know where to begin with that, as there are so many arguments from any direction. There's just no basis for that statement. If there is a simple equity stake to be exchanged for the investment, why would it matter how sophisticated the investor is? It COULD be more complicated, but it's just as likely that a LESS sophisticated investor could make matters more complicated.

Again, there's really no reason for you to post this at all except to be argumentative. If you dont see the difference between an unsophisticated investor that buys into you and your idea vs an institution, sophisticated angel group/VC then wow, just wow. This point really needs no explanation.

Also, a rule of thumb that, for example, small investments under $1m should be financed with convertible notes at 15% over three years is ignorant. Any advice throwing around numbers which doesn't take into account the project, the market, basically anything, is ignorant. If the interest rate went down to 3%, do you think you would have to agree to a 15% note? Or if they went up to 13%, do you think you could find anyone to take on this risk at 15%? And three years? Why three years? So you can pack all of the debt into the first few years of the project, thus reducing free cash flow to a bare minimum, and ultimately killing any good chance at fast and effective growth, if any growth at all?

What part of "in my opinion" do you not understand, or is it that your life is so empty trolling YE all day that you have to attempt to dispute an opinion? Good luck with that.

Let me explain this so even a person of your intelligence can understand: To attract investors you have to pay above market rates. It doesnt matter what happenss to interest rates tomorrow so long as what you are paying, given the risks of your investment are on par with projects of similar risks. The term only matters in that it too meet investors criteria. I can tell you from experience that investors for smaller deals like 2-3 year terms. Additionally, I also stated that the OP would need to be able to service the debt.

Let me clue you in on something. With notes you have no more liability than if you issued stock. If you cant pay, you cant pay; happens all day every day. Investors like the assurance that they have "X" amount of dollars payable at a specific time. The founders of the company retain thier equity and it makes securing additional financing much cleaner.

Again, congratulations that you've had (an) experience with the funding of a project, but please don't offer advice unless you really know what you're talking about.

There you go again. That comment in another thread about being leery of low cost consultants such as yourself must have really hurt. It wasnt directed to you although thats the onbly place I can see all this pointless hostility is coming from.

Ive never solicited on these forums nor have I ever claimed to know everything. Do I know what Im talking about? You're probably right I have no idea what I'm talking about. I havent been involved in pre-IPO deals for years, I havent raised tens of millions, I havent structured more offerings than you'll ever look at. I didnt just negotiate a no cash deal on a $700k shell for half the trailing interest in a compay thats been seasoned.

Grow up moron.

[Cole Taylor]

Then perhaps you shouldnt have started talking out your ass.

[adkot]

haha... you guys are funny.

Either way, I have learned from advice you have both given (Jonathan and Cole). The rest of your posts, I'm just entertained by.

My simple low-experienced opinion is that you need to show the investor how you will make them money, how much money they will make, and when will they get the money.

I guess that's similar to trying to get a job. You want to know what work you have to do, how much they'll pay you, and how often. Hmmm....

(postulating a theory)
So maybe its like an investor is looking to "work" for you, you just got to make sure he'll like his job. A lower wage worker (investor) may not care as much about the details as a higher wage worker. Just remember that investors are more (intelligently) risky than workers.

Anyways, it makes sense to me. I'm sure there are a freakin ton of details to cover, but I have seen that you don't have to have every t crossed and i dotted to attract investors.

On the other hand, a chunk of the companies I have seen that do not cross every t and dot every i turn out to be losers or scams.

Shoot, I don't even know what an "every t crossed and i dotted" plan should really look like... if it even exists. But it better make me feel like all the details are covered.

[bzboy]

I appreciate the input especially from sleighter =) (Im assuming he made the "spell check" post because I misspelled one word in my entire post)

I will look more into it. As I first stated in the beginning, I'll be going to private investors and hopefully walk out of there knowing the terms and work on an agreement. Im the sole owner of the corporation. Ive just never needed an investor before. But considering the fact that my current business is successfull and I want to expand, now is the time I need one to broaden the corporation by creating another great addition.

Thanks again to those who gave valid responses. I will continue doing research