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Am I getting a fair deal?
I've been working in the real estate industry for almost two years. I just got my Realtor license, and created a website that generates leads. I need money to help with marketing, and got in touch with one of my good friends who would be able to help. Instead of letting me personally borrow money, together, we're going to start an LLC, split 50% / 50 %. The LLC is going to take out a loan from my friend with 8% interest. He is moving hundreds of miles to help get this thing started, and I welcome his involvement, even at a 50% share. It just doesn't seem like an investment if it's a loan to be paid back with interest. In similar situations, would a company arrange to pay back the investment with their share of profits, in this case 50% of the company? To me, it seems like I am giving up a lot just for a loan. I appreciate your answer in advance.2 years ago - 1 answers
Well... it seems to me that everyone has to have some skin in the game.
You are putting in your work, he is moving to help with the work.
It isn't an investment exactly. It isn't venture capital...it's a loan. 8% seems a bit high in this economy..you probably couldn't get cheap interest from a bank, but this is a person who is supposed to be invested in success. I would ask for 5%. that is still more than he could get anywhere else.
Be sure the LLC is the only entity obligated to pay it back...not YOU. Make sure the repayment is set only to a minimum threshold of NET profit. You don't want working capital pulled from the company when the LLC cannot afford it.
Finally.. figure out what the value of what you have done..web site, lead generation, etc. Make a loan to the LLC from yourself for that much at 5% also. Seems like that is the way to level this playing field. Then you each have an assigned value to the "skin" in the game: he brings his future labor and a cash loan, you bring your future labor and what you have already built.
Make sure you spell out in writing what labor each of you are required to perform to maintain the 50 % ... you don't want a partner on the golf course every day while you are working in the office all the time. If you don't want to have your existing equipment as part of the company...make that clear in writing....or..include it in the total value ($) you bring as part of the 'skin' you have in. Be sure you specify exact how the future company would be taken apart and when. Such as..each agree that company will not be sold before January 1, 2019. At the time of a future sale the other partner will have the right to purchase with a monthly payment to the other for the purchase price.... or whatever..... just be sure that everything is laid out in writing.
Did you ever hear the saying....fences make good neighbors? Well.. contracts that completely spell out everything make good partners. for the same reason.