Providing startup capital: liquidate rental property or take a personal loan?


1

A friend of mine is starting his own company based off my proof of concept and we have arrived at two alternatives for me to help him out financially in this endeavor in regards to rental property he owns:

  1. I buy his rental property: he cashes out and uses the money as startup capital; for me, put up a ~$100k down-payment and the rest as a loan, while the rental money comes in

    This way I free up the capital he has tied up in his rental property that he can now put into the startup instead.

  2. he keeps his rental property and uses it (and the rental income) as leverage for loans.

    I invest the ~$120k (that I would otherwise have used to buy his rental property) as capital in his startup

I designed the core product and services his company will be based off but don't want to be a co-founder/partner or hold equity (perhaps only sweat equity) in the business: his company will pay me in royalties and consulting fees.

Royalties, I believe, has all the upside (pure monetary income) and none of the downsides (liability in case of lawsuits, bankruptcy etc) of "investing" in a startup?

Before I went forward and got the ball rolling, I wanted the community's perspective and feedback on both the paths (and any other alternatives we might have not brought up)

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asked Nov 27 '13 at 10:25
Blank
F1 Student In Us
141 points
  • Turning down equity and replacing it with "royalties" is crazy talk. Lawsuits and bankruptcy? Check out the legal protection an LLC/S-Corp/C-Corp provides... – Ekoostik Martin 7 years ago
  • You've already done all the work on the product? I'd stay away from putting in money if I were in your shoes - either into the business directly or into a rental property. he can get someone else to buy it. Why do you need to buy it? It is too messy. – Tim J 7 years ago

2 Answers


2

I buy his rental property: he cashes out and uses the money as startup
capital; for me, put up a ~$100k down-payment and the rest as a loan,
while the rental money comes in


This way I free up the capital he has tied up in his rental property
that he can now put into the startup instead.

This makes sense, if you don't want to take the risk of the investment into the startup directly. You have a tangible asset that you buy at its fair value that is worth its price. You also get a cashflow of rental income, and can resell it later to untie your own capital.

he keeps his rental property and uses it (and the rental income) as
leverage for loans.


I "invest" the ~$120k (that I would otherwise have used to buy his
rental property) as capital in his startup

This makes sense, if you want to invest in the startup and enjoy the benefits of being the angel investor of the next Google. How much do you believe in it?

In this case the "invest" is not a proper way to think of it. Its invest, without the quotes. You will become an investor, shareholder, equity holder.

Royalties, I believe, has all the upside (pure monetary income) and
none of the downsides (liability in case of lawsuits, bankruptcy etc)
of "investing" in a startup?

Most ridiculous statement ever. How did you come up with this?
answered Nov 27 '13 at 18:31
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Littleadv
5,090 points
  • Good to see you. Well having 2 good ideas out of 3 ain't too bad. This company will not be the next Google, it's more of a lifestyle business. Where do I clarify about my misconception about Royalties (on this forum or a related one)? – F1 Student In Us 7 years ago
  • You can ask a question about what's the difference between royalties model and the ownership model, and also why they're not mutually exclusive – Littleadv 7 years ago

0

Can this guy continue this business without you? If I was him, I would be worried that this business is built on your ideas, but you have no skin in the game. You are going to want to come up with a written agreement spelling out your path here.

And from your perspective, you really want to make sure that this is spelled out so that you are protected too. If you hand over these great ideas and a chunk of money and he runs it into the ground, or you guys come to a crossroads with how things should work, you as an employee receiving royalties, will have no say in this.

When working with a venture capitalist, they are going to want their hands in everything so that they can make sure it doesn't nosedive and they can help steer this so they can get their money out of it. That is their goal. If you are just looking for protection, do you really have confidence that this project is going to make it?

Either way, get it in writing so you both know what to expect.

answered Nov 28 '13 at 07:34
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Jmoyer8
81 points

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