First Time Investor Advice

bartooseboy

Hi Everyone,

I have been asked by a good friend of mine to invest in their new business.. €15000 for 15% of the business.... the business idea itself is a sound one and the people involved are all honest hardworking people...my problem is i have no idea how investing in a business works??

what can i expect to have to do for my €15k investment?
Do i get a monthly / yearly dividend?

I apologise for my ignorance but i honestly don't know these things and obviously don't want to lose face by asking my friend...

all answers greatly appreciated

"a fool & his money are easily parted"

Speculator

bartooseboy wrote: »

Hi Everyone,

I have been asked by a good friend of mine to invest in their new business.. €15000 for 15% of the business.... the business idea itself is a sound one and the people involved are all honest hardworking people...my problem is i have no idea how investing in a business works??

what can i expect to have to do for my €15k investment?
Do i get a monthly / yearly dividend?

I apologise for my ignorance but i honestly don't know these things and obviously don't want to lose face by asking my friend...

all answers greatly appreciated

So your friends business is valued at €100k?

Surely you should know what to expect from your investment, it concerns me that you have to ask these questions, you will have to come to some agreement before parting with your money. And remember if the company goes bust you will lose everything.

bartooseboy

Hi Speculator,

I was expecting an answer along those lines alright and i understand your concerns. but i do know what i am letting myself into risk wise and its a risk i can afford.

However i just need to know the basic rules of an investment....noone seems to be able to answer me this...all text books etc give info on investing in stocks and big multi-national companies etc but nothing on a small business.

The make up of the business is 4 investors (40:40:10:10) with the 2 main investors working and drawing a wage.....i'm assuming that when the accounts are done at the end of the year IF there is a profit i would be entitled to 10% of it??? am i right in saying this? (from the business plan we have drawn up its actually year 2 before profit is forecasted)

Again all advice greatly appreciated (including advice that tells me i'm mad!!))

Jim2007

bartooseboy wrote: »

However i just need to know the basic rules of an investment....noone seems to be able to answer me this...all text books etc give info on investing in stocks and big multi-national companies etc but nothing on a small business.

There is a very good reason for this, private investors don't get involved in providing venture capital, so there is no interested in reading books about it!!!

You are interring an investment area that is very specialized and usually carried out by the kind of professionals that don't frequent these boards, so don't be surprised if there is a very low response rate.

One thing I would suggest is that you have the business plan reviews by a couple of professionals who specialise in the business area you are going into, so that you are sure it is a reasonable plan. And of course always remember that the majority of new businesses fail.

Jim.

bartooseboy

Hi Jim,

Thanks a million for that. Thats sound advice about getting the business plan looked at.


I still havent gotten an answer re what do i as a minority investor get from the business though??

he who dares, wins

Jim2007

bartooseboy wrote: »

I still havent gotten an answer re what do i as a minority investor get from the business though??

There really is no generic answer to this, it will depend completely on the individual proposal that is made to you... what have they offered you???

Jim

Blisterman

Personally I would be very wary of investing in a friend's business.

What happens if the business doesn't go as well as expected, and you feel it's due to your friend's bad management? Would it put a strain on your friendship?

bartooseboy

Hi Blisterman / Hi Jim,

Jim: Basically i will be getting a 10% stake in the business. My understanding of this is that assuming the business becomes profitable i will be entitled to 10% of the profit.

Blisterman: I agree with you here about a strain being put on my relationship and it is something that i have considered. Obviously its something i will have to thrash out with them before i put pen to paper.

the most valuable thing you make is a mistake - you can't learn anything from being perfect

NewDirection

I'd recommend watching the Venture Capital and Capital Markets series of videos on the Khan Academy for a basic summary of the process of raising capital in startup companies.
There's about ten videos, about ten minutes in length, well worth the watch.


http://www.khanacademy.org/?video=raising-money-for-a-startup#venture-capital-and-capital-markets

bartooseboy

hey Newdirection,

Just watched the first of those videos. Exactly what i was looking for. Thanks a million. That khan academy is an amazing resource.

Thanks again.

A good decision is based on knowledge and not on numbers - Plato

alejandro1977

quick answer is yes you'd be entitled to 10%
however the founders seem to be getting a wage as well as the profits (40% 40% ?)
so to me that seems a bit off. If they have a genius idea, or say lot of experience/local hero status then fair enough.

Are they putting up capital also?

don't want to lose face by asking my friend...

that should be the least of your worries. Don't be afraid to sound silly. You have money, he wants your money.

Maybe the county enterprise boards etc have some basic info and real live person/mentor you can talk to.

bartooseboy

Hi alejandro1977,

Thanks for your reply.

Yes both the other parties are putting in €40k capital each. They will also physically be working there so to be honest i don't have a problem with them drawing a wage (wage to be agreed).


I must look up my local CEB and see can i find a real person! (asking a public sector worker for advice on a private sector investment)

Noone ever choked to death swallowing his pride - unknown

alejandro1977

bartooseboy wrote: »

Hi alejandro1977,

Thanks for your reply.

Yes both the other parties are putting in €40k capital each. They will also physically be working there so to be honest i don't have a problem with them drawing a wage (wage to be agreed).


I must look up my local CEB and see can i find a real person! (asking a public sector worker for advice on a private sector investment)

Also - and I'm not being smart - if you have a relative etc with a Junior Cert Business Studies book it might be handier than going on websites.

it will give you the basics on how a balance sheet works and how shares are allocated.

SBWife

As for your question regarding profits. You will be entitled to 10% of any increase in retained earnings based on your equity position but there is no requirement that these be distributed at the end of the first year or at any time in the future. In a situation like this there is zero liquidity and often no exit strategy so be sure that you're not going to need the monies you invest anytime in the future.

Isoaxe

SBWife wrote: »

As for your question regarding profits. You will be entitled to 10% of any increase in retained earnings based on your equity position but there is no requirement that these be distributed at the end of the first year or at any time in the future. In a situation like this there is zero liquidity and often no exit strategy so be sure that you're not going to need the monies you invest anytime in the future.

That sounds exactly right. You are in 10% (equity) ownership of the company at the start. If it is in any way capital intensive and/or there are plans to expand, the profits generated will be ploughed back into the company. I doubt you will see any return in the form of dividends for a long time.

However, if the business is successful it may well be worth significantly over €100k in the future. In that case, your 10% share would have increased proportionally with the business. If you find another buyer for your share, and sell out at that higher price, you will have made a profit on your investment. Again a big 'if' in finding another buyer since it is a very illiquid investment.

One final thing concerns stake dilution. If extra capital is needed and it is unfeasible to get a bank loan, additional capital may have to be raised through offering other people a stake in the business. If this happens, current stakeholders share will be proportionally reduced. Since the guys running the business own a combined 80%, they'll probably have final say on any matters like this if they come to a consensus.

SBWife

Isoaxe wrote: »

One final thing concerns stake dilution. If extra capital is needed and it is unfeasible to get a bank loan, additional capital may have to be raised through offering other people a stake in the business. If this happens, current stakeholders share will be proportionally reduced. Since the guys running the business own a combined 80%, they'll probably have final say on any matters like this if they come to a consensus.

It's pretty common for minority investors to insist on the right to invest in any subsequent fundraising rounds on the same terms as new investors so that they can protect their stake. That way you always have the choice of whether to invest more and retain your percentage interest in the business or to pass on the round and be diluted.