Should I give an investor equity for a short term investment?


1

We are not so much a start up company; been doing business for over 7 years and started off with an investor which was considered a loan with interest. Now we are up to receive anywhere from $100-$250k. We want the investor to be short term (only 2-3 years) and we are trying to decide if we should give equity or not.

We value our company at $2 million, but we do not plan on selling it anytime in the next 5 to 10 years. What's the best plan to go? Giving up equity (if so 10-15%), or issuing a 3 year term with interest on the exit strategy? Could this also work as convertible debt?

Equity Angel Investors Valuation

asked Nov 16 '12 at 18:01
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Andrea Wilson
6 points

2 Answers


1

Short answer - No, do not give equity. Why? Because:

  • If the investor is a temporary investor, why make them permanent by making them (partial) owners of the company? You're creating a problem you'd have to solve later, for example
  • the company will likely be illiquid i.e. you can't buy/sell your shares in a public or large private market. So only people who would buy this investor out would be the existing owners (=you!). Will you have the cash to pay out 15% of your company's value just to take back what you are planning on giving?
  • Even if you do have the cash, why burn it this way? You'd give them equity right now, only to buy them back at a (likely) higher valuation! You are better off growing the business by reinvesting the money (or just take a distribution among yourselves)
  • If sounds like the investor wouldn't be adding any strategic value. So you may not require the closer ties/"tied at the hips" relationship that comes with equity stake in a venture.

Introspect why you feel like you have to give equity to the investor. You may or may not give equity (and if yes at some %). However, your reasons should be clear and strong.

Regarding convertible debt - don't use it to postpone the introspection and internal answers. If your financial model DEMANDS it (for some reason), go for it. But otherwise you are basically deferring the decision to a later date AND the decision will be made by the investor (it's effectively an option ). So no guarantees their decision will be made in your best interest.

answered Jan 25 '13 at 13:58
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Sid
649 points

1

The concept of a 'short term' investor is problematic if you are not planning to sell up any time soon. The investor will need a return and if you want them out after 2 or 3 years you/the business will need to buy back the shares and this would place a call on possibly a significant amount of cash when the business may not necessarily have it to spare.

Convertible debt, as you mention, could work. But it depends on your (or their) reason for wanting to be short term. If you fail to repay the loan and it converts then you defeat the object and end up with a long term investor anyway!

If you want the 'investor' to go away after 3 years, then that is what loans are for! If the investor requires some for of security then convertible debt could be an option if nothing else is available.

answered Nov 16 '12 at 22:44
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Harunahi
148 points

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Equity Angel Investors Valuation