How should I make a proposition for a promissory note?

Hi,
You show him the opportunity.
You show him how much you need and how you will spend it.
You show him how he will be able to see what's going on and watch his investment.
You then let him make you an offer.

If you'd like to discuss this particular case, please request a call.

Thanks

Dave

For hundreds of videos on buying, selling, financing and managing small and medium sized businesses, visit my blog at www.DavidCBarnett.com

I'm intrigued that you wrote that you have a business plan which is an investment document. If an MBA prepared the business plan, they should have discussed and outlined how you should proceed. If you are using the term 'business plan' to refer to the strategic plan for your business, your questions make sense. An equity agreement is binding and should be entered into with an experienced business or securities attorney. Equity is nothing more than a concept if your company is unregistered. Any bona fide investor would be unwise to give money to an informal entity. Your guesstimates of what level of return should be paid and the way you wish to approach this investment indicate you are in need of legal leadership.

A promissory note is not the proper vehicle to use for what you're proposing - and a 20x return is HUGE....way too much!

You'd be amazed at how many times you don't actually need "money" but rather ingenuity to start a business, and also there are a number of grants available from various sources and/or bartering opportunities that can be structured with existing business's for what you need.

I'd be happy to help you explore options - please feel free to call upon me. I've started many businesses of my own over the last four decades, and spent many years assisting others after that - when I was in commercial lending.

It sounds to me like you've got the desire, and you've put some time in - quantifying that is necessary so that you appear to have some skin in the game may prove very useful to you as it will likely improve your chances of persuasion.

Congratulations, you are now in the great game of business!

If you are offering him 10% for $70,000, you are putting a $700,000 value on your company. Does that sound reasonable to you?

Its good that you are thinking of offering an 'vc' level return (20X return is on the lower end of what a good venture capital firm might look for, although not the bottom of the range), but keep in mind that VC's also vet their potential investments very carefully (imagine if you were competing with 50-200 other founders also pitching something similar to your potential investor: could you see yourself being the 2 or 3 that are chosen for investment?), AND THEN after that competitive selection process, most of the companies will fail.

If your investor is savvy, he'll know this and appreciate your 20X return offer. However, offering him more - i.e., 1% of the company AFTER he has already gotten 20X return - is a lot, and you are really starting off the negotiations with offering him too much.

Remember, asking for investment is the same thing as selling your company. You are asking your potential investor to 'buy' your company at $700,000, except you don't want him to buy the whole thing, only 10%. You are selling, and your offer is only the start of a negotiation process - keep that in mind.

A promissory note is great - it changes the investment from a traditional investment into a mere loan. This is also called non-dilutive financing: great if what you are building is going to need more investors in the future and/or will be successful. If you've already poured 2 years of your life into this, then that is a good indication that you are ahead of many other wannabe startup founders: a very, very high percentage cannot go 2 years on a single startup.

I suggest offering him a promissory note with a reasonable interest rate - say prime + 3 or 4 percent - and give him an option to convert to shares at a mutually agreed price within 2 years. Ideally you set up a 'mercy' period of, say 6 months, where you pay nothing back. Then you set up small, but increasing monthly payments so that you are paying him back, and set the payback period over maybe 2 or 3 years depending on how long you need to become cash-flow positive in your business. Then, during the time of payback with your monthly payments, give him an option to convert the outstanding balance of his loan to you into equity, and work out a way to calculate the valuation so that he/she gets a discount from what would be then-market value for the shares. Maybe offering a 20% discount would be a good starting point?

Good luck!