How is investors compensation handled?

I am very new to setting up investor compensation and need some help on how it is generally done. When bringing in investors they will receive a % of the company, do they get that % of monthly/yearly revenue? Or a set amount each month paying back their investment?

Also, when bringing an investor could you negotiate a term like 'after 6 months 125% of investment will be re-paid, and then they are no longer affiliated with the company?

Any help on this would be greatly appreciated, thanks guys!

 

You can sell part of the company to them in the form of stock or a % of ownership. They then share in the increased equity and any profits. If not in the form of stock they may "general" or "limited" partners.

A limited partner has the potential for gain with no risk of loss other than the initial investment. A general partner shares both the potential for gain and future operating or litagation losses.

This form of investment would be more of a bond or commercial paper. They are just loaning you money for a period of time usually with a specified rate of return.

Preferred stock is sometimes sold this way with the right of redemption at some point in the future. A cumlative preferred stock is one that pays a guranteed dividend. The cumlative part means that in the event the dividend is not paid for some reason the value of it is added to the stock and is treated as liability on the company books.

Preferred stock holders sometimes wind up owning a portion of a company that bellys up.

Be careful promoting any of the options publically if you are not a licensed securities dealer and have not filed the mountain of paperwork necessary with the proper agencies. Doing a deal with just a few people can still get you in hot water if the deal goes sour.

The safest option for a small deal is the limited or general partner followed by a commercial paper issue. The latter is really just a loan which can be secured or unsecured.

 

If I do sell a % of ownership, how is reimbursement done? % of profits? What if I sell the company, they get their percentage of ownership in the sale price?

 

If you sell part of the company, you are selling stock (sometimes refered to as equity). The owner of the stock hopes to make money in one of two ways: you pay them a part of your profits (called dividends or a distribution) and/or they sell their stock to someone else for more than they paid. Given that your company sounds small, there probably is not a ready marketplace of buyers who want their stock, so their hope is that you will sell the entire company in the futute for a higher valuation than they paid.

Given the tone of your comments, I'd stongly advise you to speak with a lawyer who is knowledgeable about fundraising for private companies. Also, remember that finding someone who is willing to invest is a much harder challenge than figuring out how to structure the transaction.

 

Mharad's answers are really good. . .

Equity is much more complicated, when you sell 10% of the ownership, it is not re-imbursed per se. The investor owns 10% of the company, when ever you pay out money to all the share holders, 90% goes to you and 10% goes to him. If you ever SELL the business, 90% goes to you and 10% goes to him.

A loan might be the easiest thing to do and figure out, (like getting a small auto loan). BTW, if you need a loan, let me know, I'm looking to lend money to webmasters through prosper. I setup a website to do it webmasterlending.com. How much do you need? Just PM me the concept.