Entrepreneur

Going merely off of what you stated:

They want an equity stake in your company, you would own 95% and they would own 5%. They have also valued your company at $600,000. If you take their money you wouldn’t owe them anything but they would be part owner of your company though you would retain full control.

Do you believe your company is worth $600,000? Do you need the $30,000? If you feel your company isn’t worth $600,000 then this might be a good deal. If you need the $30,000 to help you expand then this might be a good deal.

If your company is worth more than $600,000 then it’s probably a bad deal and if you do not need the $30,000 for any reason then it is a bad deal.

If someone wants to buy 5% of your equity for $30,000 that means he/she is valuing your company at $600,000.

5% of $600,000 = $30,000

Buying equity is not a loan. You don't owe that money back. But you should have a conversation around if your new potential partner is expecting quarterly or annual distributions of profits generated.

He's saying your company is worth $600,000 and he wants to own 5% of it. When you sell he'll get 5% of the proceeds. If the company ever distributes money to the owners he'll get 5%.

5% equity is very different than 5% interest.

If it was until it is paid off, that would be called a loan.

An investor gives you money in exchange for an ownership stake, but you don't pay him back the cash.

Was his name Mr. WoOnderful? In perpetuity...

well investment is different from loan, though they can overlap.

if they are investing 30k for 5% they they believe your business is worth 600k in value (they believe if you try to sell your business it will sell for 600k) - if this the route they are offering, they would own 5% of your business, and be entitled to 5% of any dividends you pay to shareholders (if you pay profits to the owners of the business), when you sell, they will be entitled to 5% of whatever the business ends up selling for.

If its a loan - then they might be saying the'll lend you 30k, and you have to pay back 30k + 5% (1500) - they would not own part of your company.

the third scenario is where they lend you 30k as a loan, but once it reaches a certain point it would convert to equity (i believe called a convertible note, but check as not my area of knowledge)

assuming its equity - you need to determine if 600k is a realistic value for the business, and if you want this person involved in your business, you should speak with a lawyer.

next, you should also consider if you need the 30k, and if there are better alternatives (e.g. borrow from the bank) to get that 30k.

If you have good credit you can open up 0% introductory credit cards to get capital. 5% is a good rate, 0% is better. If they want 5% interest forever I would say no deal, and if they want 5% of your business I would tell them to fly a kite off a high cliff.

Lots of good comments. I would add, in case it's not obvious, don't do it unless $30k is going to make one heck of an impact.

Ah okay that makes sense thank you!!

Something doesn’t really seem right. How do you know this man? This is a highly unusual offer. Why does he want to invest in your company? Offering you $30k for 5% of a landscaping company that made less than $50k doesn’t make any sense. I think there is a chance one of you is misunderstanding the other? Did a stranger approach you online? Could by trying to scam you.

That would be a $30k loan. He wants to do an equity investment. Meaning he doesn't expect the $30k to be repaid like a loan, but rather to be paid out 5% dividends of the profits, and also to be able to sell that 5% to another investor, if you guys get aquired or whatever.

A $30k loan would expect regular payments and interest.

Aside from that, there are a plethora of ways to structure deals, and that is for you two to negotiate.

Is it an investor or a competitor?

5% is peanuts truth be told, perhaps it's a competitor wishing to gain inside info about your business?

Usually when people want to invest they would ask double digit minimum.

There is a lot of good advice here but also a lot of guesswork.

You need to get a clearer idea of what he is offering. What you have now is a messy high-level concept that a lot of people have interpreted.

From my read, this could be a simple offer of $30k for 5% of the business and hence 5% of any dividends. This would seem to be a terrible deal for the investor and I doubt that is the offer.

It could also be equity with a royalty (which sounds like a bad deal for you), equity with a profit share (which could be ok in some cases) or a preferred share structure.

I think you need to:

1. understand the meaning of equity and debt and understand the differences between revenue, profit and dividends.
2. get him to write out the idea in at least one paragraph or 3-5 bullet points
3. post here again

Not necessarily a question for the op, but why would someone want to buy such a small percentage of a small company? There’s no ownership on it

This deal doesn’t make any sense at all.

Sounds like pref equity with a 5% coupon or could just be a 5% hurdle. If you need capital but don’t want to be squeezed by interest on bank debt you could structure this as PIK interest so it doesn’t require any service in the interim. Way too little info here to actually know what is being proposed though.

never take the money if you dont need it. equity is always more valuable if you see a realistic long term vision. But, if they can help you grow then its worth it, 10% of a watermelon is better than 100% of a grape.

Alright how do I start a yoga studio just for men over 40?

Ownership is all you need, fight for it and keep as close as 100% possible. Don't sell it cheap, better to use your own savings.

Are you sure tgis isn't a scam? Do you know them? How did they make the offer? How did they value the company? This sounds like a scam.

Is your company really worth $600,000. If not, it's a scam.

Out of topic, how did you started a landscape company? For me its a saturated market... but seems that is not. What do you offer differently?

Someone once approached me and offered to give me their old piece of shot car because mine was broken down. I took it, and we ended up married with two kids. I’d be careful.

It might be more effective to clarify the terms with the person making the offer than with random people on the internet

Selling 5% of your business for $30k not worth it. Better off getting a loan from your bank. This person will own 5% forever. Your corporate structure will be complicated. (How will you account for and share profits).

Raise equity from outside investors only when you need the money to scale or to share risk.

If it's 5% equity it's straight forward. They get 5% of the business and any owner's draw they get 5%. I'm assuming this isn't a very small business (under lets say 500k), because they wouldn't be accounting for owner's/managers salary. For that investment you should be netting around 300k (after reasonable owner/manager salary), growing every year, etc. I say net, because these types of service businesses usually sell for 2X EBITDA. Look at similar businesses for sale or even talk to a business broker (or a few) to get a better idea. Tell them you're interested in selling your business and want a valuation. That usually includes owner/manager salary -- this is the reasonable rate if you were to hire someone to manage the business.

It always depends on how the contract is written, but purchasing 5% equity is usually straight forward. Alternatively, he could want 5% of revenue, profits before any distributions, etc. A lot of possibilities for how the contract is written.

If he's looking for for 5% there are a lot of other ways that aren't as risky as investing in your business. There are a lot of angel groups he could join and invest in 1 or 2 of the startups (normally min is 20k). Those are more risky, but usually have a higher multiple return if they're successful.