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    3 Replies Latest reply on Sep 30, 2009 12:51 PM by bm911tax

    Advice partner/investor

    Ronald870 Newbie
      Good morning! I am looking for some advice on what to offer a money partner/investor. I am starting a small manufacturing company with a friend of mine and for the past several months it has just been an idea in planning. We have spent probably 100 plus hours writing a business plan, manufactuing sample products etc etc, and planned on waiting until spring when we both have a fairly sizable amount of money comming in to get things rolling. We showed the business plan to a couple different people for feedback and both said they would be willing to put the money up to get it going now. The timing is perfect right now as we already have orders from clients we talked with during our research stage. Both prospective partners/investor would want to make more then just interest on their money, understandably.

      My question is do we make that person a 1/3 partner with a buy out in a set amount of years? If so does that principal amount get paid back in addition to the buy out? ( we will all be contributing equally in some form - rent on building - equipment - vehicles - etc) or should we set it up as a monthly principal payback with small interest and a percentage of profits for a certain amount of years? If so what would be a reasonable interest rate and percentage of profits to pay? How long would be reasonable years to pay profits?

      Any suggestions would be greatly appreciated.

      Thank you

        • Re: Advice partner/investor
          LUCKIEST Guide
          Advice partner/investor

          Sounds like you need a lawyer
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          • Re: Advice partner/investor
            bm911tax Adventurer

            It will depend on several factors; will the investors be passive or non-passive. What type of tax structure will your company adapt? What type of entity will you be operating under? You should talk to a tax advisor to make sure you do it correctly.



            • Re: Advice partner/investor



              Before you take money from other people, here are a couple things to take into consideration:


              Ask the investors what they want for their investment. Unless they are unsure, it is better to get the other party to put their cards on the table so you know where to work from instead of making an offer that may exceed what they demand.


              How well do you know these potential investors? Realize that taking on partners is similar to a marriage. Do you think that you will be able to get along with these investors even if they don't have a daily hand in running the business? Take this seriously! I know more than one business that failed because the partners couldn't get along and agree how to operate the business and apply funds. Even if at the beginning they are not involved in running the business, they may force decisions if they feel that they are at risk of losing their investment.


              You will want to draft an agreement that details what their investment entitles them to and include at minimum the following:


              • Annual compensation
              • Payout of dividends
              • Types (preferred vs. non-preferred) and amount of shares issued
              • Voting rights
              • Daily responsibilities
              • Do you reserve shares for future employees and investors or who gives up shares if needed
              • What happens with shares if a shareholder leaves the company (or worse even, passes away)


              There are free documents that you can find online for partnership agreements, but as Luckiest mentioned, it may be best for you to seek out a competent lawyer.


              As for the amount of partnership, again, see what the investor wants first. Does their request exceed their involvement in the business? If they are putting up 100% of the money, chances are high that they will want more than 1/3 of the business even if they aren't working in the business. Realize that basically they are buying a concept and taking on high-priced employee / partners. If the idea fails, they are at 100% loss while you simply lose your time. Most people will want more than 1/3 share in the business for this risk. Without knowing more details, it is hard to say what percentage is justifiable.


              Hope this helps.


              Doug Dolan


              The Solopreneur's Guide