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Question added to topic MoneyJune 16, 2008

What is an acceptable investor return when the start-up company is service-oriented?

I source and sell organic ingredients by locating suitable suppliers and facilitating purchases. I am accepting financial help from someone with extensive experience in the organic industry, who also provides advice, leads, etc. from time to time. He changes the terms of our original agreement on a regular basis. Most recently, he requested one-third to one-half of the profits I earn, although we orginally agreed on 1 percent. I would like to make an educated counteroffer and need direction.
First, let me say that changing terms in the way that you describe is unusual and, I would think, unacceptable. These things should be put in writing, reviewed by attorneys and made to last.

Second, hands-off investor return doesn't come according to a schedule like tax rates. It depends on a lot of things, most especially risk. Anybody can get market interest on money by putting it somewhere safe, like a bank. The hands-off investor wouldn't take the risk on a smaller company without getting a shot at much higher returns. Professional investors look for high-risk ventures that offer them huge wins if they do win, so that the occasional winner can pay for all of the losers. High-risk ventures often fail. Service businesses are not normally attractive to professional investors.

Which brings me to the third point, the non-monetary benefits. In your case I'd have to suspect your investor is not a professional investor but somebody with a relationship with you, who wants a lot of intangible return like contributing to an interesting venture, taking part in the decisions, being involved in an attractive industry. All of which boils down to the problem that there is no simple answer to your question.

Tim
Tim Berry is the president of Palo Alto Software Inc., based in Eugene, Ore., which produces business planning software. He is also the author of 3 Weeks to Startup and The Plan-As-You-Go Business Plan, published by Entrepreneur Press.

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