If you are interested in starting a small business, likely you will have investors involved. Your investors may be friends and family, but many times your investors will be third parties who believe they can make money with you. With all investors, you need to determine how they should be repaid.
There are several options for repaying investors. They can be repaid on a “straight schedule” (for investors who are providing loans instead of buying equity in your company), they can be paid back based upon their percentage of ownership, or they can be paid back at a “preferred rate” of return.
If investors are paid back on strict, scheduled payments, it is likely because they are loaning money to you as opposed to purchasing equity in your company. This can be good for you if the terms are favorable, but can also be more risky, as the payments would likely become due regardless of how successful (or unsuccessful) you might be.
More commonly investors will be paid back in relation to their equity in the company, or the amount of the business that they own based on their investment. This can be repaid strictly based on the amount that they own, or it can be done by what is referred to as preferred payments.
Preferred payments would be where the investors are paid back at a higher rate than the amount of the company they own. This would occur in the case where the business owner’s equity in the company is greater than the proportion of capital that he contributed. For example, even if a business gets 80% of its capital from investors, the owner might keep 50% of the equity. Investors may prefer to be paid back by preferred payments, so it might be set up so that they are paid back at a rate of 80/20 (or even 100/0) until their investment is repaid, as opposed to a rate of 50/50 as the equity breakdown would suggest. This shows your investors that you are motivated to pay them back as soon as possible before you start to receive money based on your equity. However, it is important to note thatpreferred payments are not allowed for all business types(i.e. S Corporations).
If you’d like to learn more about structuring your business and ways that Helbraun Levey can help navigate the process, please click here:https://helbraunlevey.wpengine.com/legal-services/corporate/, or contact Andrew Fine to get information directly from the Chair of our Corporate Group.
FAQs
There are several options for repaying investors. They can be repaid on a “straight schedule” (for investors who are providing loans instead of buying equity in your company), they can be paid back based upon their percentage of ownership, or they can be paid back at a “preferred rate” of return.
How does an investor get paid back? ›
The most common is through dividends. Dividends are a distribution of a company's earnings to its shareholders. They are typically paid out quarterly, although some companies pay them monthly or annually. Another way companies repay investors is through share repurchases.
What is the best way to repay investors? ›
Share Transfers. You can repay a loan by swapping the debt for equity shares, giving the investor a proportionate ownership of the business equal to their investment. Consider paying dividends to your stockholders. Dividends would be cash payments made to shareholders and would be paid from the company's net income.
Do investors in restaurants make money? ›
A restaurant investor may be paid in two ways, depending on the investment structure. These include receiving a share of profit and/or receiving interest. An investor who provides capital for the restaurant in exchange for a percentage of ownership (equity) receives a share of the restaurant's profits.
What happens if you can't pay back investors? ›
What if you can't pay back an investor? If it is a professional investor — it is fine. They write it off and move on. Unless there was some sort of fraud or something, true professional investors will be fine with it.
What is the average return for an investor? ›
The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation. » Learn about purchasing power with the inflation calculator.
Do companies pay investors back? ›
Shareholders expect the companies that they invest in to return profits to them, but not all companies pay dividends. Some companies keep profits as retained earnings that are earmarked for re-investment in the company and its growth, giving investors capital gains.
How often do investors get paid? ›
A dividend is usually a cash payment from earnings that companies pay to their investors. Dividends are typically paid on a quarterly basis, though some pay annually, and a small few pay monthly.
Can investors ask for their money back? ›
Finally, you could also take legal action against the company. This could involve filing a lawsuit or demanding that the company's assets be sold in order to repay investors. Taking any of these actions could be difficult and time-consuming, and there's no guarantee that you'll get your money back.
What is a good return to investors? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
If we stick with that $2 million number, that restaurant owner making $200,000 on every $1 million, in five years would make $2 million. Plus add the equity from paying down the loans each one of those years, you can quickly see that, yes, you can get rich in the restaurant business.
Is it risky to invest in a restaurant? ›
Sixty percent of restaurants fail within the first year of opening while 80% close within five years. 1 The largest financial risk to your restaurant business is underestimating the amount of capital you'll need to begin operations and continue to bring in a positive cash flow.
What is the payback period for restaurants? ›
A good restaurant ROI is often defined as the ability to recoup your initial investment within three to 5 years. This benchmark is considered both realistic and sustainable in the restaurant industry. Achieving a three-year payback period demonstrates financial health and ensures a positive return on your investment.
How quickly do investors want their money back? ›
The bigger the better. In general, angel investors expect to get their money back within 5 to 7 years with an annualized internal rate of return (“IRR”) of 20% to 40%. Venture capital funds strive for the higher end of this range or more.
Do investors always pay cash? ›
Most investors pay for properties in cash so you won't have the uncertainty that comes with a buyer applying for a mortgage. Even when a buyer has been preapproved for a loan, the lender can decide the buyer's credit-worthiness has changed and refuse to issue the funds needed to buy your home.
What percentage do angel investors want? ›
As a result, negotiating and structuring the deal can be the most complex aspects of angel investing. Angel investing groups generally aim to take 20 to 50 percent ownership stake of early-stage companies. Therefore, structuring the deal and negotiating the terms begin with the valuation of the company.
How much should an investor keep in cash? ›
Verhaalen often recommends clients maintain a cash reserve that's, at a minimum, the equivalent of six months of income.
What do companies do with investors' money? ›
For companies, money comes from the payments they receive when investors first buy their shares. This cash infusion can help companies in a variety of ways, such as helping to pay off existing debt and funding growth plans they can't—or don't want to—finance with new loans.
