Using private equity and plans.

**Lawrence260** · 08-23-2006 03:46 PM

I am starting up a company that I need only 100K to start. I found a investor in UK that his investment company is setting up the details. Well I got an offer today for them to own 22% of the net yearly for 5 years with a buyback of the current value. Does this mean I pay them the 100K at the end of the 5 years to buy there 22% back so I can have full equity ownership again? They would stand to make approx 90K a year for 5 years (450K) then the buy back. This is got me concerned but I could use the money, but dont want to make a bad decision and get screwed and locked for 5 years. How would they know what my net is? Is there any legal recourse if they dont like the returns they are getting?

**4-Knots** · 08-23-2006 04:34 PM

I think you need to discuss it with the investors more in depth. Terms of investment should be made crystal clear, its not the sort of thing you want to have a dodgy understanding of.

**MsNadi** · 08-23-2006 05:05 PM

Basic Finance - you'd have to pay him the present value of $100K with whatever interest interest you agree on. Think of like a mortgage.

Principal: $100K
Interest Rate: __ % (compounded annually)

And you'll get your buy-back rate.

I'd recommend doing some research on about.com on basic finance (or even seeing if you can find a college professor's course notes online). If not, you might want to find a financial accountant, and pay the $200 for ONE HOUR of his/her time. It's worth it.

Because guaranteed should you move forward with this agreement (which is a great one) - there'd be some finance/legal jargon that you simply wouldn't understand.

$100K for 22% - your company has an estimated valuation of ~ $455,000? Very COOL!

**Caliny222** · 08-23-2006 05:05 PM

what? "got an offer today for them to own 22% of the net yearly for 5 years with ..." Net yearly what??

**MsNadi** · 08-23-2006 05:09 PM

Question for you: how'd you go about attracting the investor? Personal network? Personal Contact - someone put you in contact with a contact of their own? Traditional investory relationship methods - shopping your idea around?

Inquiring minds are curious.

**Lawrence260** · 08-23-2006 05:27 PM

Ok..that explains it. I thought that the buy back would be his intial investment of 100K after 5 years. The equity would be secured in a share certificate of 100K.

I offered a private loan with a 70% simple interest but they proposed the equity investment that blew my mind and no way will I jump into this deal with them for 5 YEARS!

Originally Posted by MsNadi

Basic Finance - you'd have to pay him the present value of $100K with whatever interest interest you agree on. Think of like a mortgage.

Principal: $100K
Interest Rate: __ % (compounded annually)

And you'll get your buy-back rate.

I'd recommend doing some research on about.com on basic finance (or even seeing if you can find a college professor's course notes online). If not, you might want to find a financial accountant, and pay the $200 for ONE HOUR of his/her time. It's worth it.

Because guaranteed should you move forward with this agreement (which is a great one) - there'd be some finance/legal jargon that you simply wouldn't understand.

$100K for 22% - your company has an estimated valuation of ~ $455,000? Very COOL!

**Lawrence260** · 08-23-2006 05:29 PM

22% of the net profit. Which on avg would make him 75K-100K a year. So in essence this could make him closed to 500K and then a buyback of 500K.

Do I have the word "idiot" written on my forehead?

I am just curious where to find some sample of more rational deals that are similar.

Originally Posted by Caliny222

what? "got an offer today for them to own 22% of the net yearly for 5 years with ..." Net yearly what??

**Lawrence260** · 08-23-2006 05:30 PM

This is an investor that answered my add on Go Big Network from the UK, who put me in contact with his investment compant that invest money for him.

Originally Posted by MsNadi

Question for you: how'd you go about attracting the investor? Personal network? Personal Contact - someone put you in contact with a contact of their own? Traditional investory relationship methods - shopping your idea around?

Inquiring minds are curious.

**Lawrence260** · 08-23-2006 05:33 PM

My thing is, sure I can do this then make sure the net is low. I.E pay myself a nice salary, pay a consulting firm, pay a VP, or whatever and show a low NET. My plans were to show a ZERO net each month anyway, but than this would change things.

**noname** · 08-23-2006 05:35 PM

Originally Posted by MsNadi

Question for you: how'd you go about attracting the investor? Personal network? Personal Contact - someone put you in contact with a contact of their own? Traditional investory relationship methods - shopping your idea around?

Inquiring minds are curious.

You shouldn't answer some1's question with one of your own. It makes it harder to read the thread and means the thread-starter may not get the answer to his/her qustion. If you want to ask him something then PM him.

**MsNadi** · 08-23-2006 07:27 PM

70% interest - you'd have to CRAZY to do that for five years. After five years, it'd cost you to close to $480,000 to buy back your 22% - which is fine if you're company becomes a $5MM company in five years.

But then I'm speaking purely from the numbers side. I'm not well versed in venture capital - maybe 70% is a realistic figure...I dunno. :shrug:

**MsNadi** · 08-23-2006 07:29 PM

I answered the question first and then came back to post.

Hmm... random thought: I'm always curious about people who say things and end them with smilies ... it's kind of like when people start a statement with "No Offense, but" _____.

But yea - I've got my message board ettiquette down, thanks.

**MsNadi** · 08-23-2006 07:31 PM

Keep the valuation. Reduce the buy-back figures or incorporate the amount of revenues earned in the buy-back figures (i.e. a sliding scale - if X is accured over 5 years, you owe him $300K for the shares, if he earns Y over 5 years, you owe him $200K for the shares etc).

**Glee006** · 09-17-2006 07:02 AM

Originally Posted by Lawrence260

I am starting up a company that I need only 100K to start. I found a investor in UK that his investment company is setting up the details. Well I got an offer today for them to own 22% of the net yearly for 5 years with a buyback of the current value. Does this mean I pay them the 100K at the end of the 5 years to buy there 22% back so I can have full equity ownership again? They would stand to make approx 90K a year for 5 years (450K) then the buy back. This is got me concerned but I could use the money, but dont want to make a bad decision and get screwed and locked for 5 years. How would they know what my net is? Is there any legal recourse if they dont like the returns they are getting?

sorry if this sounds like a stupid question, but how did you estimate that they would make 75-100k per year? i dont understand the mathematics. how can you predict your yearly net.