If I work with an equity investor, will they forever own part of my business?
I want to start my business and need financing. However, I do not want to give up ownership. I am looking into using an equity investor, which I understand will own the business. Is their ownership forever or until the loan is paid in full? Also, what percent should I be willing to give up?
An agreement between you and your equity investor should be drafted. The terms of the agreement will specify the structure of ownership and loan. The percent that you are willing to give up will depend on the amount invested. You should make sure that you remain a majority ownership.
Best of Luck!
This is a great question that comes up at the start of most any business that is capital-intensive. If you can't start this business without capital, your actions have to do with taking on loans and or taking in an equity investor. In the case of loans, they come with interest and principal payback and at any start up position, they are deemed to be extremely risky and you may have to put up personal collateral to guarantee the loan. In the case of equity, you do have to give up a piece of the business. Having said this, you need to keep in mind that without this loan and/or equity, you may not have a business at all and therefore the investor becomes a critical part in moving forward. Don't underestimate the fact that he expects to make money and much more so as an equity investor where he takes significant risk versus a lender that may be secured by other collateral. If you go with an investor, have a discussion with the investor as to whether at some point you can buy him out. Unlike interest, it may be a multiple of his investment. As an example, if I put $100,000 for 25% of the business, especially as a startup, it is my opinion that I may be entitled to a return of anywhere from $300,000-$500,000 or more depending upon your ability to negotiate. You cannot assume an investor, putting in $100,000 would accept a 6 to 8% return as this is just unreasonable. If I was the investor, I may be willing to take on this risk as long as you took a modest amount of compensation, such as $25-$30,000 and after that, we share profits 50-50% until I received my investment back and then an allocation based upon my 25% and your 75%. As an aside, I might not be willing to make this investment at all if you are not putting 100% of your effort and time in the venture. All of this is by way of example and your issue regarding wanteing 100% percent of the company is referred to as a "clawback" where you can buy back the stock of the original investor. Hope this helps a little and good luck
There’s something you really need to understand. A business has just two choices for raising capital (getting money): a loan or ownership. Do not confuse these two.
A loan is an agreement to use someone else’s money, pure and simple. They give you $10,000 and you pay them $500 per year to use it. At some point in time, you pay them back the original $10,000. There are dozens of variations on this, but that’s the expectation for both parties, spelled out in advance.
Both parties expect something else with ownership (equity). The owner of a business calls the shots, both literally and figuratively. All weighty decisions and all profits flow back to the owner. With multiple owners, all decisions and all profits flow back proportionally. Importantly, IMPORTANTLY, democracy rules and the majority owner gets the final say. And, yes, this lasts forever. At some point, you might buy them out or they might buy you out, but legal ownership lasts as long as the company does.
Not every equity investor demands a controlling interest (51 or more percent), but they all expect something. Profits, dividends, jobs, perks, growth, something … without some return, there is no reward for investing. I’m not going to give you my hard-earned money without some form of compensation. Either interest on a loan or some significant benefit from ownership.
In a sense, you get to decide what you’d like to do. The reality, though, is that potential investors don’t need you. There are hundreds or thousands of places to invest, and you are just one option available to them. Your offer must be enticing or they will not lend you money or buy into your company. An investor has most of the leverage.
I hope this brief explanation helps.
An “equity investor” is, by definition, someone who owns part of the business. The money an equity investors gives you is not a loan so there is no “pay-off.” If you can find someone who is willing to invest in your business as a part owner, that person will own that part of the business unless and until you buy him out. If you wish to retain control, sell the investor less than half ownership of your business.
Based on your question, I suggest you consult a lawyer who can explain the details and draw up the appropriate paperwork.
You are asking a very important question and a good one, so thanks for being curious. The answer is it depends on how you structure the deal. You can structure it so that you own 50 percent plus .01 and the other investor owns 49.999 percent, and if each person has one vote per share, you keep control of the company. You can structure the deal where you get 50 percent of the equity, the investor gets 50 percent, and you get two votes per share, and they get one vote, and you have 66 percent control, so you see, in terms of equity ownership, it depends on how many votes per share each owner has. You could also structure the deal with a loan, where the investor loans the business money and the business pays the loan back over time. Also, that loan could potentially be converted to equity over time. I would talk to a banker about how to go about this in a way that accomplishes whatever your objective may be. I hope this helps answer your question.
Yale Bock, CFA
Y H & C Investments