How should I compensate a silent investor?
My business partner and I are in the process of opening up a second business.It sounds as if you are looking for an angel investor to help launch your business. Angels typically are affluent individuals that provide capital in exchange for equity ownership or convertible debt in a start-up business.
Typically, these investors will take seats on the board of directors and provide strategic advice when necessary.
When structuring the deal, it is important to assess:
1. The amount of capital you need
2. The ownership you are willing to give up
3. Management's relationship with the silent investor
The compensation that you provide this silent investor really depends on whether you are looking to secure convertible debt financing, straight debt or pure equity.
With the convertible debt and straight debt options, the compensation would be based on interest due to the investor and a distribution for a company takeover. If it is just equity, then the main form of compensation will likely be a distribution as a result of a dividend issue or company acquisition or public offering.
Typically, it is not very appropriate to provide a silent investor with a fixed salary since they do not have any involvement in the operational aspect of the business. However, companies have compensated the board of directors with a fixed salary or mix of stock and options.
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