Not a Stock Question but an Investing Question

[stevenmac2]

I think as a Venture Capitalist company, you must establish a set of criterias and rules when it comes to funding any business - even when it is an idea from a VC member. Again proper due diligence needs to apply here that includes an overall business plan and marketing plan.

The idea for a Venture Capital Firm is to invest in various companys that will bring about high ROI. The question becomes why would the VC business want to fund 90% of a startup business alowing him to control it without any proven track record of ever succeeding or turning a profit. As an investor, you goal is to recover your initial investment first, then your anticipated profit for entering into such a business transaction. What is best for the company is to take ownership by enabling yourselves to making key business decisions, while your friend continues to run the day-to-day management & operations. Once the business is successful and more of the money is recovered, you can begin to relinquish some of that control back to him. Sorry, as a rule learn "business is business" - no hard feelings.

Typically, turn-key or franchise operations have a greater degree of being funded because there is a proven business model. And not only are you investing in a business model, but you are also investing in the management team (the person/people behind the idea).

By following the VC company rules (with no exceptions of being a VC member or not), typically for a new startup business a VC can own up to 80 to 90% of the company in the initial stages, but you may want to relax that a little if your VC members have confidence in the idea and expecations, then you could consider a 30-40% owning interest or some other percentage you feel fair.

With personal feelings and relationships aside, if the business idea and the model is not sound, then the VC company should not invest in the business.

The biggest questions I would ask if I were a member would be :

1) When will we get our initial investment ($9000) money back?
2) If the business fails or the loan defaults, how will that be handled by the company? Do you make him sign a personal guarantee as a bank would do for a personal loan? If you lose this money, then you just lost the leverage yourselves to invest into a really great business idea should the opportunity come along.

Something to keep in mind not only for yourself and your VC firm, but for any company/business you invest into - heed the words of the SBA:

Small Business Administration:

"Starting a small business is always risky, and the chance of success is slim. According to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years."

Small Business Administration -

That is a very sobering warning to any business owner or investor.

Steven Mac

[stevenmac2]

I should add that I am not trying to be negative with your ideas or dreams. I just want to get you thinking about the flip side of the coin to handle valid scenarios that every Bank or VC encounters every day.

If you continue reading these forums, one of the things you will learn is that those here who are successfully investing in the stock market follow very rigid and clear rules in their trading system. It is these rules that prove them wrong, removing aside personal opinion and emotions so they don't lose everything they have worked for.

In the same way, with you being a startup company yourself and with so many people involved, a loss could bring disaster to the morale, unity and overall performance to the team and business, eventually causing it to fold.

The best advice I could give to you is this:

1) Form and establish the VC company first. Trying to launch one business is headache enough.
2) Once the foundation and the framework of the company is laid, then explore this opportunity with your friend, or start seeking other businesses to invest into.

All in all, inlcuding myself, we all share the spirit of entrepreneurship here and want to see each other succeed whether it be investing in the stock market, real estate, or a business.

For myself, as I learn about investing in the stock market, the people here on these forums such as Mark will be keeping me straight when it comes to the do's and don'ts.

So don't be discouraged, you are already on the right track just by asking questions, and that is where it has to start.

Steven Mac

[djsamson]

So let me ask you this:

Hypothetically, I were to propose a business/marketing plan. I have everything drawn out and I state that I will fund $1,000 initially. If I need $9,000, does this automatically result in the firm owning 90% of the company?

Does the price that I fund state the value of the business? 'Unknown' products like Beanie Babies started out with a mere start up cost - but once their value was uncovered a high bid was put in place for ownership.

For the firm business outline that members submit, I think I may include a spot for the member to write how much funds the business wants and what percentage of the business is for sale - not how much the memer invested.

In terms of public stocks I understand that if you fund $---, you recieve -- shares. But private/start-up business, I'm not sure that value is measured by initial investment.

Is the labor, design, innovation and work that the member developed to make the business/business plan not accounted for in the business value? What about the future labor that the member takes on if the business is funded?

[MDZ]

Wow, good stuff here guys! You are both getting into this, and that is awesome!

I am not 100% sure on this Djsamson, but I think I am right.

Hypothetically, I were to propose a business/marketing plan. I have everything drawn out and I state that I will fund $1,000 initially. If I need $9,000, does this automatically result in the firm owning 90% of the company?

No, you can value a share of your business at whatever you want. Let's say you make a share of your business cost $10 and there are 2,000 shares. You could buy 100 shares, and they could buy 900. The value of your business will then be $20,000, with 10k of that still for sale. Now, people probably won't want to buy your shares if your business is not worth 20k, but their betting on future sucess may lead them to do so.

Is the labor, design, innovation and work that the member developed to make the business/business plan not accounted for in the business value? What about the future labor that the member takes on if the business is funded?

Sorry, but I am again not 100% on this.

I am pretty sure your business will be valued on more than current assets. They can invest on hopes of future revenue and current ideas that are not making money. Inventors do this all the time. This is where a business plan is real important. You have to show the lender that although you aren't worth much now (no pun intended ) you will be in the future; and tell them that 10k will buy 5% ownership of you business that is really only worth 500 bucks today. If your idea is good enough, and you are a good enough seller, the money will find you.

Hope that helps some, and if anyone else knows for sure on these, please let us know. Talk to you all soon,

Mark

[lehayes]

While there is some good information here from everyone, I would suggest that you talk to a business attorney. They will know the finite details and be able to help you get setup. They may even have some targets for you to get started with. Finally, you may have to also learn about how the SEC guidelines control what you can and cannot do.

I can say that as an equity investment, you would be getting Preferred stock as a private investor. This means that you MUST be an acreditted investor in the eyes of SEC. Your partners included.

If you are interested in doing this, let me know, I am interested in having an investor give my business a little boost. I am looking into acquiring a loan. Banks won't touch me right now because I have not been in business long enough and by the end of January, I will be looking to acquiring equipment for laborers I need to get together.