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To answer your questions we are going to need more information. What is your website? What does it do?
The more information you provide the more detailed the answer you'll receive.
Without other information as the other poster asked for:
How does you business plan on making money? Are you selling a product or service? If so, what price will you sell it for and how much does it cost you to provide the service or make the product. The difference between the two in your gross profit. Then, you have to understand your overhead - your fixed costs - like selling and marketing, salaries, rent, utilities, equipment (office equipment and equipment to provide your product or service), etc, etc. Any thing that is left over, after you pay taxes on that amount, can be either used to pay back your investor or to reinvest in the business.
If your business is web based and is designed to only provide information, how do you plan to make money from it? Will you use affiliate links, sell your information, or have advertising? Again, the difference between what you expect to bring in and what it costs you to provide these services is what could be used to pay your investor.
Regarding your second question, your investor should be able to determine how much of your business they will need to realize the gains they require on their investment. This will also be based on the first question. If you can say that your business will bleed off $1,000 a month in profits, then your investor should be able to determine the amount of the company they want to own based on portion of that profit they will get.
Example, let's say your investor wants a 10% return on their money in 24 months. To achieve this, the investor would get $553 per month for 24 months. That will provide the return of the investment and a 10% return on the capital. Thus, your investor would seek 55% ($553 / $1,000) of the company for 24 months. Now, if the investor has a longer investment range (more than 24 months), then the investor would have to determine a present value of the business - lots of methods to do that - then, the presentage of that value their investor would cover. Example, your business has a present value of $100,000 (this is perpetual value), the percentage of ownership would be 5% ($5,000 / $100,000).
Hope this helps
I love the response I am getting from this forum. I do have another question. My investors (6) are friends of mine, and they are offering to loan me $1,000 to $4,000 each for my website. I want to look at this as just a loan from them with the thought of forfeiting all profits and salaries until the loan (s) is paid in full, which is expected to take around 14 months. This money will be used to get this website up and running (start-up funds). So, my question, if someone lends me $1,000, do I pay them back $1,000 plus the prime interest rate, or if someone leads me $4,000...you get the picture.
Thanks so much for your helps.
As long as you are making profits, they should get a portion of the profits that reflects the percentage of their investment. But you is this a loan or an investment? Loans require a person to pay back the amount plus interest whereas an investment means they are assuming some of the risk and are not promised a return on their investment if the business does not make profit. Traditionally, investors recognize a higher percentage of profit than the interest paid on a loan because they are assuming more of a risk, this is something to keep in mind. There is no rule that says it has to be one or the other, you can have a loan program for those who are not risk takers and an investment program for those who are.
It is important to draw up an agreement that is clear about this and other terms. Here comes the standard - "get a lawyer and an accountant" line. It is good for both parties to have a clear agreement that both sides approve of.
Did I answer your new question? No, I didn't. I think you set a percentage rate that everyone is cool with, prime seems low for such a short term loan but the figure is up to you.
You need to define with your friends if they are "investing" in your business or "lending" your business money.
Debt versus Equity.
As in previous posts, equity carries more risk and potential higher returns.
An equity investment could mean a % of future profits and no payments until those profits are hit.
If it is debt, and the business has no assets, are you personally guarnteeing the loan?
Being a small business give you the flexibility to structure many types of paybacks and/or hybrid financing.
Sit down and discuss what each of you wishes to accomplish and what their expectations are.
Try www.virginmoney.com for some ideas
Please remember friends and business usually never mix well together.
Are you willing to give up your friends? Because if at some point you fail or do not do as good as you had originally thought, what happens to them and their money. Will you get a full time job and pay them back or tell them "oh well, you knew it was risky". Are you are asking them for an unsecured loan and they have no assets to secure their money. Have you clearly communicated the risks to them as individules.
I have invested a small amount of money in a couple of different friends web sites and what bothers me most, is they both failed and while I was not worried about the money (less than 4k), one of them started telling me stories about how they had something big coming up, which never materialized, until the web site was finally shut down by the ISP due to non-payment . So in my case, I made a small investment for a friend, they failed and now for whatever reason (embarassment, lying, whatever), I do not hear from them anymore.
So please think twice about borrowing money from a friend and make sure they know everything that can possibly happen (the good, the bad and the ugly) and most important, do not make a promiss you can not keep, to a friend or business associate.
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These are two questions that I am getting from my potential investors....who happen to be my friends and believe in what I doing based on my business plan. How do you suggest I answer these two questions? The investments amount are around $5,000.00. Thank phbalance
- How will the website make money for its investors?
2. With my investment, what portion of the business will I own?