Making a new business investment with my long-term employer


2

My employer of 5 years is looking to start a side-business that complements our current business. We're a software developer and I'm his lead developer and longest employee. I trust him implicitly, he's a very upright guy who sticks to his morals and I have no issues about working for and with him. We've got a lawyer who will do up all the documents and contracts to make it official.

As a part of this new business, I would be looking to invest around $50,000 and would become the director of the new company. I have no doubt that this new company could cover its initial startup costs in about 12 months.

I have approx. $20,000 cash that I can use. What's your experience in getting the extra $30k? Is that the kind of thing I should be speaking to a business banker about, or do they only deal in much larger numbers? Is a line of credit against my house going to be OK, or are there rules about where the money can come from?

I'm in Australia so I don't know rules or whatnot is different. What are the catches I should be looking for when sourcing the money? Is it advisable to take an unsecured loan or a line of credit for a sum that small?

Finance

asked Oct 25 '10 at 10:01
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Mark Henderson
111 points
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  • Why do you need to invest cash at all? Can't any cash investment wait until you have working code? I would imagine your project/product is software so why wouldn;t you just work on this on the side and that is your equity? – Tim J 8 years ago
  • @Tim - I'm currently a software developer, but the new company is hardware-based and there's approx. $100,000 worth of specialised equipment to purchase upfront. – Mark Henderson 8 years ago
  • Given that he has an existing business and the new business would complement it I would imagine a loan is the best way to go - or an outside investor. I don't see any real benefit of using your own money... It would be a different story if you were an accredited investor or could stand to lose the 50k, but it doesn't sound like that is the case. hardware (to me) seems a lot riskier than software, and if it isn;t then just go get a bank loan through the company since there is existing company to do the loan through. – Tim J 8 years ago
  • This sounds VERY ignorant of you. You are a lead developer and dont know how to get a credit over 30k USD from your bank? Unless you are from china / india this is pocket money for somoene in your position. Definitly not something a bank will balk at as a credit. – Net Tecture 8 years ago
  • @NetTecture - What on earth does my position as a lead developer have to do with knowledge of getting credit at a bank? $30,000 is half my yearly wage. It is not pocket money. – Mark Henderson 8 years ago

3 Answers


1

I'm in Australia too and as far as I know there are no rules about how you source the money as long as it is legal. :)

Possibilities are:

  • Savings
  • Equity in your home
  • credit cards
  • loan from family/friends
  • Bank loan (if they will give you one)

You may also be able to negotiate something so you don't have to put the whole $50,000 in up front. For instance:

  • Can you forego some of your future income and invest your 'sweat' instead of your $? (If you are the exec director you should probably get some additional equity for taking on this role anyway.)
  • Can you lease the equipment so you don't need a large lump sum upfront?
  • Can you stage your investment, ie. invest some now and then more when the business has met important milestones that show it is on track?

I assume you have been open with your partner about your situation. You should be able to negotiate something to suit both of you.

answered Oct 25 '10 at 12:56
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Susan Jones
4,128 points
  • @Susan - thanks for the advice. I've been very open with him and he's aware of my situation. This is the first time I've dealt with this kind of money (apart from my mortgage) and I'm trying to scope out if it's a good idea to use unsecured loans, or if I'm going to shoot myself in the foot if I use my cash, etc. – Mark Henderson 8 years ago
  • I think Tim has a good point that it is easier and makes more sense for the existing company to loan capital to the new business. Is there a specific reason he wants you to put your own money in? – Susan Jones 8 years ago
  • @Susan - he didn't actually ask for my money, but I went into him asking if he was open to the idea of making an investment, mainly because I'm looking to make an investment in the future, and if I'm going to be working for the new company I may as well work towards increasing the value of my share in the company rather than just taking home a pay packet at the end of the day. – Mark Henderson 8 years ago
  • I'd much rather work for value than a pay packet too. You need to define what you are each contributing to the venture, not just in money terms. You will be contributing your time and ideas as well as taking some career risk. You are entitled to a piece of the pie even without putting money in because it sounds like without you this venture wouldn't be happening. Will your partner also be active in the business? What else is he contributing? – Susan Jones 8 years ago
  • @Susan - he brings with him the good will of the clients. Without it there'd be absolutally no way I'd be considering anything. He's also twice my age so he's had twice as long to build a long-term relationship with the would-be clients of the new business (it's 90% sure he could get them to sign a contract with us before even starting the company). – Mark Henderson 8 years ago
  • Anyhow sounds like *everyone* is recommending lowering the initial startup costs by leasing, so I'll have to bring that up with him and see what he says. Thanks so much for the advice though! – Mark Henderson 8 years ago

1

As Tim commented above, it seems odd that you would need to be considering something as risky as a second mortgage on your primary residence to invest in this startup. It is much more realistic for your business-owner partner to seek a business loan to expand his business with this new spin-off (which could be partially owned by the current company if there was some board or accounting concern that funds should not be used for a completely independent side venture).

For the average worker, acquiring an unsecured personal loan for more than $5-10k is harder than you might expect. If your credit is great and you have a good banking relationship, it's possible here in the US but generally our bankers favor loans of that size for purchases like autos or real estate. It's harder to get a loan of that size to fund a startup simply because most working class and professional Americans simply have too much debt and their income-to-debt ratios and payment histories are often too sketchy. This may not be the case for you, and the whole banking climate may be different in Australia, but I would guess it is still more realistic for an established profitable business to get a $30k loan for expansion than it would be for a first-time entrepreneur who is investing their max cash to get that much more on an unsecured personal loan.

The best advice is probably to make sure you can afford to lose everything you're investing. You may be totally confident that you'll succeed, but you wouldn't be the first startup to feel that way and then face some ugly unexpected setbacks later. Tying so much to your personal debt and even your primary home seems very risky to me. Your partner should also be keen on limiting his personal liability and structuring this through his existing company as much as possible, imo.

answered Oct 25 '10 at 16:52
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Kelly Rued
231 points
  • thanks for the advice. I'm trying to avoid as much risk as possible, of course, and a 2nd mortgage is out of the question - but I know that there are ways of getting the money. I've never really dealt with unsecured loans, or even car loans. The only money I've *ever* borrowed in my life was to buy our house. I'm mainly trying to see if it's worth the risk investing in the company so I can get back some of the work I'll be putting in. I'm confident that my boss's overdraft would be more than enough to fund the whole company himself, but I'd like a piece of the pie if possible. – Mark Henderson 8 years ago

1

After reading Kelly's and Susan's answers, I tend to agree in part with both of them. There are things I've looked at in some of my ventures when I didn't have all the capital up front, which included a pre-negotiated sweat-to-cash contract that stated for every 1h of work I put in to the company, it was worth XX amount of dollars in investments towards the company. After all, time is never free!

The bigger picture view though comes from the challenge of whether or not you really need that money all up front. Leasing equipment or buying second-hand should be a strongly considered option when you're talking prices in the range of $100k. A common oversight for people starting new businesses is that long-term savings NEVER keep a company afloat. It's your monthly net revenue that determines the success of your business. The only exception may be property development - everything else lives and dies by monthly net revenue MNR [disclaimer: this is my personal bias based on years of experience and observation].

If you're going to take a loan out to cover that remaining investment, you'll begin monthly payments right away. Why take that personal liability on by yourself? If the company is successful, lease your needs and redistribute that liability onto the company, which is then shared by you and your partner. You can still split the monthly expenses 50/50, and keep the initial capital investment you were originally thinking (though I still maintain that you should define a value for your time as an investment). If your business allows you to cover whatever personal loans you were thinking of, it can surely cover leasing...

In the end, keeping as much of the liability on the corp rather than your personal self is always preferred. Another option is to convince your partner to have the company take out a loan which you both equally secure. This way, again, you keep the credit in the company's name, but use a portion of your personal assets as investments for loan security. WARNING: this is a bad practice, and outside of real estate, most people will tell you that taking out big loans to get started should be avoided as much as possible.

Focus on your MNR, and forget whether it will cost more in 5 years. What's that saying? "A dollar today is worth two tomorrow." (source forgotten).

answered Oct 27 '10 at 00:06
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Patrickgamer
234 points

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