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What's the Best Plan for Paying Back Investors?

I am helping to start a gourmet food truck business and while we have some family members to ask, we will also be looking to friends and aquaintances for startup capital. We dont wan't to offend them with minimal interest so we originally were thinking to offer them 10 percent over five years. But this is not a major moneymaker that would allow us to offer huge returns. We don't want to offend potential investors but have no idea what to do. Any advice?
Tim Berry answered May 27, 2011
URL: http://www.entrepreneur.com/answer/222318
What you're suggesting here sounds much more like a loan than an investment. Think of an investment as someone buying a percentage of ownership in your company in exchange for a sum of money that you'll never pay back (which is why they call it investment). What they get out of investment is ownership, which pays off either when you sell the company, or register it to trade shares over a public stock market or you make profits and pay dividends to the shareholders.

And for this kind of investment, you can't just find people willing to write you checks. There are strict legal limits and constraints related to securities laws intended to prevent fraud.

So I think the best plan in your case, since you're not planning to grow fast and sell out, is to call that a loan and get it documented correctly as a loan at a high interest rate. Make it clear to your lenders that they are getting that high interest rate because you have a lot of risk, and make sure to check all the details with an experienced small-business attorney.

Most of these high-risk loans require what's call an "equity kicker," meaning that the lenders get a small piece of ownership even if you repay the loan, and a big piece if you default. And they have to be written up carefully because it's easy to violate securities laws.

Find some experts you can work with. If you have no idea, go straight to your local small business development center (SBDC) and work with one of the counselors there. Ask that person and others for recommendations of an experienced attorney. This whole area of investment is tricky and can really destroy your business if you don't do it right.

Related: Five Tips for Asking Friends and Family for Funding
Related: Should You Raise Money from Small Investors?
Tim Berry is the chairman of Eugene, Ore.-Palo Alto Software, which produces business-planning software,
He founded Bplans.com and wrote The Plan-As-You-Go Business Plan, published by Entrepreneur Press. Berry is also a co-founder of HavePresence.com, a leader in a local angel-investment group and a judge of international business-plan competitions.