Legal Question in Business Law in California

Hi,

I have a question of which I hope you can help me with.

To get an idea from the ground I need $ 100.000. I can go to angel investors for funding but I prefer to choose people from within the industry's idea as they can add commercial value to the business and I have the network to easily establish this. To gain the most commercial value I divided the industry in 6 strategic departments, making the maximum investment $ 16,667. I don't want to give out shares of the company so I developed an investors model that is based on quick recoupment and a fixed return.

In the start up costs ($ 100,000) I budgeted operational costs that fund the first 5 years or selling 10.000 units (whatever comes first). I need to sell 6.250 units to recoup the investment so basically I need to sell 6.250 units within 5 years in order to not lose the investors funding. This equals a market share of 0,25% as the total amount of sold units in 5 year will be around 2,500,000.

I will elaborate the deal below:

Until investment is recouped, investors will get 80 cents on the dollar. The operational costs for the first 5 years or 10.000 units are already covered so there's no need to deduct any costs. They will receive 80cents on every dollar that comes in.

If my projections are right, I will recoup the investment within 12 months. This equals a market share of 1,25%.

When the initial investment is recouped, investors will get 50 cents on the dollar. The remaining 50 cents will be sufficient to fund the operational costs of the business as well as the reinvestments required for future growth. Depending on the commercial value of the investor, they can get a return up to ten times their investment. According to the projections, 36 months are needed to tenfold the investment. The agreement will end when the predetermined return is made.

What if 6,250 units aren't sold within the first 5 years?

Investors will get a return of 80% on the total revenue. If the company was only able to sell 3,125 units then the investor will see 50% of his investment back.

I would like to know if there are any template contracts for this deal?


Asked on 9/10/12, 2:10 pm

4 Answers from Attorneys
Terry A. Nelson Nelson & Lawless

Without being flippant, you are asking for many thousands of dollars of specific legal advice and services, for free, instead of realizing and taking seriously the need for effective professional help in creating enforceable contracts and government required disclosure documents necessary to a highly regulated investment, financial and business transaction. Failure to comply with regulations and laws can result in civil and criminal charges.

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Answered on 9/10/12, 2:21 pm

Mr. Nelson is exactly right. You need to start by adding legal fees to your business plan.

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Answered on 9/10/12, 3:21 pm
Edward Hoffman Law Offices of Edward A. Hoffman

I agree with Mr. Nelson and Mr. McCormick. This site can help educate users about the law, but it is not here to offer specific legal advice. And it certainly isn't here to offer free solutions to complex legal problems.

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Answered on 9/10/12, 3:28 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

I generally agree with the foregoing comments, although I also believe that an experienced entrepreneur could borrow $16,666 from six different investtor/lenders, under certain circumstances, without running afoul of the many securities laws that apply to soliciting investments, including loans.

Your most obvious problem is lack of experience and sophistication in the ways of venture capital and new-enterprise funding.

There are two kinds of money that fund new businesses: debt and equity. Equity money involves ownership or the promise of future ownership. Debt funding is basically borrowing, and lenders to new businesses will be looking for more than a little interest income -- they will demand collateral or a big upside.

I'd say that anyone who'd invest $16,666 in the proposed business venture will demand either a piece of the action or full collateral and a high interest rate.

Anyone who accepts less may be a fool, but maybe not foolish enough to fail to sue if the business venture doesn't go smoothly and profitably.

There are no templates that will be of help here.

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Answered on 9/10/12, 6:50 pm


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