Deal Structure Considerations
You contribute 20%.
Let's say you're looking for $1,000,000. If your company is a
startup (the most difficult to fund), in investor will expect you to
contribute 20% of that amount, in terms of energy, efforts and cash.
Value of investment dollars.
An individual investing $1,000,000 in your project will have had to
earn $2,000,000 in pre-tax dollars in order to make the investment
amount available to you.
Competition for investment capital.
Financiers have many opportunities to invest their money. At any
given time, real estate, the stock market, and other ventures will
be vying for their attention and capital. If you were the investor,
you would most likely be looking for the most attractive deal,
offering the best return, balanced against the level of risk
In addition to the actual investment, investors look at the
opportunity cost. Could they have tied up their money in a safer or
more profitable investment?
Early investor return of capital.
All deals should be structured so that investors get a return on
capital ASAP! They want to be assured that they will get the money
they invest back before you get your new Mercedes.
It's not uncommon for a major impasse to occur when the entrepreneur
is faced with the fact that investors want a larger portion of the
company in return for their investment than the entrepreneur is
willing to give.
It can be a shock and a deal breaker for the
venturepreneur who is not prepared for this. Making the deal structure
an integral part of the
business plan serves as advance warning that the
entrepreneur knows the investment value of the business.
More than stock. In addition to a portion of the company's
stock, some investors will also want to participate in the financial
management, marketing or other vital areas of your company.
should welcome the involvement of a professional with entrepreneurial
experience to assist them.
Tax and legal considerations including state securities laws.
When forming your company, study the benefits and drawbacks of the different
types of company structure. Your CPA can assist you by explaining the
differences between LLC (Limited Liability Company), S Corp., Sub S Corp.,
and C Corp.