Help me micro-fund my business, but not like, by YOU giving me money..

February 5, 2009 12:51 AM

I am looking to self fund starting a business, but I need to seek a small amount of additional capital. Ideally, I would like to do this through friends and family, through a more formalized agreement. So how can I "sell them" a piece of my business without selling them stock?

Basically, I would like to sell some sort of piece of paper for X amount of dollars with the agreement to repay it with X amount of return within X amount of time, or allow them to redeem it at the business for a greater amount. I would like to do this in small amounts to raise the rest of my capital.

Yeah, I know I could go get a small business loan, but the thought of doing it in a cool, non-traditional manner appeals to me.

No, I am not hoping to skip the business plan portion of things. I actually have already completed it along with my market research.

Yes yes, you are not my lawyer, and I will be seeing one shortly. I am just looking for ideas before hand.

What are some other "fun" ways to raise money to start a business?

posted by Jonsnews to work & money (9 comments total)

You're talking about barter. They give you money, you give them access to the resources of the business?

Examples of this would be that your investor could come by and use the computer or use your tech support if they had a computer problem... use your fax machine... use your franking machine (postage meter)... use a parking space at your company during the Christmas shopping season... and so on. Maybe cater a few events for them, if your business involves food?

It isn't a suggestion for barter exchange, but it needs to be said anyway: the agreement needs to be superspecific. Taking time to hash out an exact agreement on fair value might take some of the fun out of this unconventional funding scheme, but it is critical to you being able to produce a reasonable set of accounts for your business. It will prevent any hurt feelings in the future, as well. What, exactly, do you mean by "redeem it at the business for a greater amount"? Do both sides agree what that sentence means? I have seen more hurt feelings and bitterness result from people feeling hard done by their family or friends in arrangements like this one than I'd care to talk about. Hash it out in the beginning, and everyone will still be smiling later on.

As long as you aren't talking about your investors having any sort of equity in the business, the money they give to you is a loan, or could be a deposit. Either way, once the value is determined, it's just a matter of accounting to reduce the balance you owe (or they could claim back off you). Companies do this all the time - example being sponsorship agreements that involve more than just a company logo being stitched onto a team's gear. How you are best going to do this, and what tax implications it might have for you is for you and your accountant to discuss - I am an accountant, but not your accountant.
posted by Grrlscout at 1:15 AM on February 5

"redeem it at the business for a greater amount"
What I meant by that, is that I would either pay each "note" back within the alotted time at say.. 1.5 the initial cost, or they can redeem it for 2 times the initial cost worth of service.
So if I was selling them at $20 I would by the end of the agreed upon time pay them $30 if they have not redeemed it in store for $40 worth of service.
posted by Jonsnews at 1:21 AM on February 5

While we're all entirely ignorant of your particular business plan, co-operatives are the classic model for micro-finance, and have centuries of history helping individuals and communities rich in experience and enthusiasm but low in capital.
Read yourself up on co-ops, especially if you need contributions from your friends and family that aren't immediately quantifiable, like knowledge, time, and skills.


...well I think cooperativism is a "fun" way to start a business
posted by Fiasco da Gama at 2:40 AM on February 5

sell some sort of piece of paper for X amount of dollars with the agreement to repay it with X amount of return within X amount of time

This piece of paper is different to a loan contract how, exactly? All you're really saying is "Lend me $500 and I'll pay you back $1000 in a year". You might be better off with selling them stock - at least then they know it's a risky proposition with no guarantee of a return.

If you're serious about getting into business, you'll forget about 'cool', 'non-traditional' and 'fun'. That's other people's money you're proposing to arse about with. Your friends' and family's money. Do it right.
posted by obiwanwasabi at 3:24 AM on February 5

seems like instead of a micro loan, this is more along the lines of selling a bond. with the added twist of two possible ways to redeem the bond.
posted by jrishel at 6:28 AM on February 5

What you're talking about is termed a promissory note.
posted by GPF at 6:37 AM on February 5 [1 favorite has favorites]

And I should add that they're common enough that some courts (in my jurisdiction) have dedicated "note dockets" to sort out all the business arrangements based on promissory notes that have gone bad. You're wise to seek an experienced business lawyer.
posted by GPF at 6:41 AM on February 5

Setup a C corporation, which allows multiple classes of stock.

Sell your investors preferred stock, whcih usually has no voting or control aspects, but which provides a stated return.

They can redeem it whenever, but if they hold onto it and you succeed, it's a way for them to participate in your success without compromising control of your enterprise.

Unfortunately, C-corps get taxed a little differently than other business forms, so unless you are talking small amounts of income, it may be less desirable.

Just a thought...
posted by FauxScot at 7:24 AM on February 5

What obi said about "fun" and "cool."

But that doesn't mean you can't be creative.

It would be quite simple contractually to structure a loan so that it pays higher interest, or a preferred so that it pays higher dividend, if taken in the issuer's goods and services than if taken in cash.

The serious complications are going to come in with regard to that kind of paper's tax and accounting implications, which could be severe for you and/or your lenders / shareholders. Could be a non-starter.

Cooperatives are great for their purposes ... but not really a good vehicle for "alternative" capital raising for a business which is not going to be operated as a cooperative.
posted by MattD at 8:08 AM on February 5