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Hi all! I've been debating whether or not to post this… but here it goes!

I know we have a great group of educated, successful people on this forum, so I wanted to tap into this resource. *I understand that all opinions given are just that, and will not base any portion of my decision on replies to this post. I just wanted to see what some of your thoughts were.

I was just approached with an offer to become a 50/50 partner in an early stage start-up company. It is a “lifestyle” business, targeting consumers to by a form of artwork. I truly believe in the concept, and see huge potential, but I’m a little concerned with the proposal.

As it is now, the founder is looking to make me a partner for “use” of my credit score. The founder has had a tough divorce which drove them into bankruptcy. They propose to operate the business financially, under my name in order to secure a business loan and vendors. I understand that I would have to personally guarantee the loan, and if the business went under, I would be solely responsible for the repayment. Please don’t think me naive or stupid for considering this; I really love the concept and believe this company will become profitable fairly quickly. In the proposed opportunity, the founder has also included a clause in which they have the opportunity to buy back my half of the company for a said amount, but are willing to retain me as an offcer (with salary) after the possible buy-back.

The company has already had some great exposure: local news, is already scheduled for a few national talk shows, has celebrity clients, and is in talks with some global retailers.

My concern is the liability and the proposed ROI. Should I be basing my ROI analysis on the loan amount which I am debating putting into the company? I have researched and found that many investors venturing into start-ups seek a return of 7x’s…

Opinions?

*I understand that all opinions given are just that, and will not base any portion of my decision on replies to this post. I just wanted to see what some of your thoughts were.

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Breitling for Bentley 6.75
Rolex Datejust
Omega Planet Ocean

I understand that I would have to personally guarantee the loan, and if the business went under

Isn't one of the huge attractions of forming a limited company to limit liability? I can see why he would want you on board as a partner if your credit rating is better than his in terms of applying for loans for the company as it would certainly look better as proof that you understand how to manage your finances well, etc., but if you have to personally guarantee the loan...

Unless it's a small amount of money (whatever your financial situation determines 'a small amount' of money to be, obviously it's different for everyone) that you are prepared to lose, I wouldn't consider it.

This reeks of sh*t. Sounds like they just want to use you. I was not down with the plan before I even got to the buyout clause. They want your credit to get them up and running so that they can establish their own credit and then dropkick you through the uprights.

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-RJ

Thanks guys, I appreciate your opinions.

@RJ, I hear you. They are very upfront in disclosing the fact that they are ofering the partnership to me in order to leverage my credit. Though I would somewhat feel used, I would be compensated for the use of my credit, and also for the purchse of my portion of ownership (50%). Its just the risk I'm concerned about... say the business does go under... my partner would be able to walk away scott-free..thats why ifI do venture into this opportunity, I want the reward to be worth the risk...

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Breitling for Bentley 6.75
Rolex Datejust
Omega Planet Ocean

Anez,

Thanks for your reply. The thing with an LLC is that the company would have to have assets to put up as collateral in order to secure a biz loan (if I'm not mistaken). At this time, the company is leasing its real estate and has minimal equipment, nothing worth nearly what we would need.

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Breitling for Bentley 6.75
Rolex Datejust
Omega Planet Ocean

As with any partnership, I believe that with few exceptions, each party should bring a fairly equal monetary share to the table. This business can go under and your partners can turn around and start another one without a problem. You wont be so lucky.

It comes down to weighing the risk. I dont know what kind of dollars we are talking about here, but you have to look at it from the perspective that if things go 100% perfect and according to plan, you get bought out for X amount of dollars. If things go south, you lose your credit. How much is your credit worth to you? Would the buyout be an amount so great that this is worth it? You are responsible for paying the creditors if things go bad, but are your partners going to be contractually obligated to you for half of the amounts? Are there assets/credit so minimal that it doesnt even matter to them?

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-RJ

I'm with RJ on this 100%. There is no way on Earth I'd be prepared to become fully liable for a loan for someone elses business proposition. Essentially it's a speculative investment, and if you were providing funds for it from your own savings then while it may still be a gamble, at least you wouldn't be in debt if the business failed. However, I'm assuming you can't cover the cost of the investment yourself (hence why they are looking to "use" your credit reference loan purposes), which by extrapolation means you wouldn't be able to cover the cost if the business failed. It sounds like you'd be hanging everything on the business succeeding, so you could potentially be financially ruined as a result of a poor decision here.

It's also worth considering that the Small Business Administration has found that only around 66% of new businesses survive at least two years, and 44% survive at least four years. Not amazing odds (although better than what some people believe), so just factor that into your ROI calcs. From these stats there's a 1 in 3 chance that you'll be entirely liable for repaying that loan within 2 years, and a greater than 1 in 2 chance you'll be left holding the baby within 4 years. Will you recoup your investment before then even if things don't go quite to plan in the first few months? You'll have to look at the various scenario planning that your potential partner has come up with. Does it stack up? Etc.....

Personally on the face of it I'd steer well clear, but then you obviously know more about the opportunity than we do.

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Driver8

Site Moderator

Lots of issues here. A personal guarantee should scare the hell out of you.

Though the credit markets are obviously not as good as they have been, credit is still out there, and if this idea is as good as it sounds, it available. Interest will likely be high, there may be significant covenants tied to the debt, and you are going to have lenders looking over your shoulder, but its available. As a CPA, I specialize working with troubled companies and higher risk start-ups. The troubled companies always find a way to restructure their debt, and the start-ups always find credit, no matter how risky.

These guys wanting you to be on the hook for the debt is simply scary. One of the biggest issues is that start-ups chew through working capital quickly, often with little revenue coming in. The monthly payments will be your responsibility the instant that the company cannot make a payment. The impact to you may not be 3 to 4 years down the line, it could be within 6 months based on how quickly the loan proceeds need to be spent. Additionally, as the concept appears to have a product, I am going to assume (potentially incorrectly) that the loan proceeds will be used on promotion, advertising, salaries, and not on the purchase of equipment, facilities, etc... If this thing fails, you could potentially be stuck with no assets to sell to assist in paying off the debt. If you buy equipment, at least you could likely get 50% of the cost of the equipment back to pay off the debt. If you are paying for advertising and promotion, this will be much more difficult.

Another thing is that many of the start-ups that I have worked with take out an initial loan, get moving along, and always need a secondary loan for expansion, working capital, whatever. Who is going to take on this (potential) second loan?

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Rock Chalk!

Curious as to what direction you went with this.

Others have made very valid points. And I agree with all.

Let me throw in some other points. In this kind of situation, I would ask for 51% of the partnership. It's your credit at risk so you should be calling the shots. How involved would you be with this business? If you have no plans on monitoring this on a daily basis, then this really is not for you. So that is the liability side, very risky and you should compensated for taking this risk.

As to ROI, this is really up to you. But if you own 50% of the company and in 5 years the company is valued at 100 Million, then they need 50 million to buy you out. From your post it sounded like they wanted you to loan them money and pay it back and in turn call you a 50% partner. If you are buying into this business, you need to own 51% to direct what is going on, as your credit is being used. Then at a later date the other partner(s) can buy it back from you at the current company valuation and set it at no lower than your original investment. Otherwise this is just a loan, and you had better be charging some high interest for the use of your money.

Also, if they eventually buy, why settle for being an officer, even salaried? I believe there is still future risk as a director and officer of the company. Instead I'd ask for a perpetual royalty of x% on all sales.

Biggest obstacle is the risk.

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As with any gamble, only bet what you can afford to lose, rational and gut instinct has come up trumps for me.

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