Start business by myself or w friend who has the needed capital?

[delasoul]

Hey guys, I really need your opinion about this and will keep it very short, because your time is limited:

I have a business idea that fits the fastlane criteria and have tested it already and got first customers and profits.

My problem: To scale it into six digits per month and plus I would need a lot of money to invest into it.

Thing is: I don't have all this money, but my best friend does.

Now I have two possibilities:

a.) NOT to take his money and grow the business all by myself without giving my best friend half of the net profits.

The good is I can do it all by myself don't relate to any friendship stuff mixed with money and don't need to split the profits 50-50 with him. The bad thing is I will need at least 2-3 years to grow it into seven digits revenue per year WITHOUT all the capital money that he can bring in PLUS I will need to take jobs etc. to get all the needed capital together in the meantime.

b.) TAKE THE MONEY and split profits 50-50 with him.

Good is I can focus completely on the business without having to worry about all the needed capital to scale it into huge revenue, bad point is: Share Half the profits, and things can go very bad if somehow our friendship goes bad (we are best friends for over 10 years now, but it's still one human ressource more into the business concept from the beginning and mixing friendship with money is a huge risk, too, right?).

What would you do? Start the business all by yourself knowing it will take you a couple years more to get into 1m+ revenue per year and more OR start the business with taking the complete capital and doing it 50-50 with your best friend?

PS: He doesn't want to run the business with me or work in the business, he just wants to invest the capital, he won't work IN the business and he has NO expertise that fits the business etc.

THANKS A LOT FOR YOUR TIME AND OPINION - it would help a lot more if some very experienced / successful guys could post, too

EDIT:

I would like to add one thing I think I didn't point out regarding the 50-50 equity:

My best friend will get 50-50 of net profits, but I own the company 100%.

 

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[Darkside]

This is a tricky one. If he wasn't your friend I would say take the cash and give him equity but if things go wrong it could potentially ruin your friendship. It could also ruin your friendship if you don't let him in on the deal since he might be bitter about it. There's no easy answer. You have to make the decision on this one because it could potentially ruin your friendship.

 

[Talisman]

Inexperienced and not-yet-successful opinion:

I think you need to work your a$$ off to hasten its growth as much as you can, by yourself. Otherwise you will be endangering the "Control" part of the fastlane, and using it as a crutch, to get-rich-easy.

 

[kwerner]

Do it yourself and keep your friend. Friends and money don't mix.

 

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[FastNAwesome]

Do it yourself and keep your friend. Friends and money don't mix.

Very true. Business is never a walk in the park, and even some trivial everyday stuff can influence your friendship.

Do it yourself, or find a venture capital elsewhere, your friend is not the only one with money, there are lots of people willing and able to invest, especially if you have already demonstrated with results that your project is profitable.

IMPORTANT: About partnerships with anyone, you may want to consider avoiding 50/50 ownership, as then it's nobody's company - if your attitudes, goals or visions ever start to differ - who will be right, when you both have the same right?

You can however make an agreement profit sharing is 50/50, but ownership is 51/49 (or more to your benefit) so that you remain in control of the business. After all, you're the mastermind behind the project, and money can be found anywhere.

Sidenote on business and friends - I'd never mix it as well. It's only different when someone first becomes your business partner, and then later on you develop a friendly relationship as well. It has it's very specific value, but it's good to fundamentally always keep things professional.

 

[richbrown360]

I dont like the idea of 50/50 equity share if all your friend is supplying is money. EG. how much help and other assets will he bring to the table?

If you just want him as a 'silent partner' or investor you should re-evaluate the % in your favour. more like 60/40 or what ever.

If he is fully gun ho going to be working his a$$ of as an actual partner then obv 50/50 would be a great deal.

Pretty difficult for both sides to figure where they want to stand on this one.

I can understand him having higher equity if your business is not tried and tested but you say it has been somewhat. Still you will not be able to for see future problems when making yourself grow.


Not that i have much experience but my 2c.

 

[delasoul]

Thanks guys for the replies so far.

I would like to add one thing I think I didn't point out regarding the 50-50 equity:

My best friend will get 50-50 of net profits, but I own the company 100%.

 

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[DrummerDad]

Coming from a guy who went through it himself:

Dont involve a friend, unless youre willing to lose the friendship.

I asked a good friend to help me with my project. He was even there firsthand when we attended the first trade show, and he saw the potential. We agreed to go 50/50, where I would do the technical/industry specific things, and he would handle the finance and money. He also had the available funds to move us along.

After 6 months of trying to convince him I needed money, and dragging him places to get him involved, he told me "his wife" wouldnt let him continue.

Anyway, we are still good friends, but it was a few months of strain and him dodging me at work, and I wont ever do it again. Go your own way, and leave friends and family out of it. You will thank yourself later.

 

[Kak]

Start it YOURSELF!!!!!!!!!!!!!!!!

 

[cfittowin]

If your friend doesn't add any value to the business, other than giving you the capital, I wouldn't do it.

Let me ask you a question, How will you feel a few years down the road when your business is profitable, and your friend is still cashing in on your hard work?

The only time I'd recommend going into business with a best friend is if you truly complement each other's skill sets.

 

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[Inphinity]

I would look to structure his involvement as a loan, with repayments of x% of net profits until $loanamount + $loaninterest are repaid, after which his involvement ceases.

 

[Likwid24]

I completely agree with inphinity. Why would you want to split profits with him when all he's doing is giving you a loan. I have a partner now but we compliment each other well. We need each other to make things run smoothly. If it was just for money i would look into structing some kind of deal so hes paid back plus makes something on it.

 

[delasoul]

I would look to structure his involvement as a loan, with repayments of x% of net profits until $loanamount + $loaninterest are repaid, after which his involvement ceases.

Yup, that's what my plan is. As I said he won't get any equity and he won't work in the business.

Thanks for your idea

 

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[oddball]

I didn't read all the replies but like some people said, I don't think 50/50 is a good idea. I think you should get more of the profits. You are going to be doing all the work, and you do have the option of not taking his investment. So it is possible, may be harder and take longer, but you can do it without his help.

I am kind of in the same boat, I am about to go into something with a partner. But he is going to be helping in the process and we both are forking up money. For me its worth it because he has some experience to bring to the table.

 

[edmundloh]

Just basing my opinion on the information you've given, I see more potential harm than good from this deal - about getting your friend to fund your initial operation. Some thoughts to consider:

- if everything goes to hell and you lose your friend's money, you're going to lose his friendship and burn some or many other bridges along the way.

- and even if the business is a success, in the long run - believe me - you will feel that giving 50% of your profits to your sleeping partner who has no hand in your day-to-day operation is too much. His only contribution of one large sum at the beginning stage of the business will become small in the grand scheme of things.

- it's also not a really good deal for your friend. If you are in his shoes, you're going to realize you have no control over the business and that it's entirely dependent on someone else.

All in all, even in the best case scenario there's a major shortcoming. The most ideal partnership is that your friend contributes as an active partner and even if he doesn't want to, and insists on investing only, how about giving him a smaller share? (5%, 10%, 20%) It will of course mean he won't contribute as much as your initial plan right now, but in the long run it's a true win-win for everyone.

Oh yes, and don't forget to write up a formal agreement! Hope this helps.

 

[mayana]

Don't do it! I lost a friend this way... I will NEVER go into business with a friend or family member ever again. No business is worth losing a relationship and even if things go really well, your relationship with that person will never be the same again.

Personally, be creative and figure out a way to bootstrap. Private message me for some ideas, if you want - also, I wrote a blog post (this week, coincidentally) about why not to have business partners, I'll send you (or anyone) the link, if interested.

Good luck!

 

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[Lights]

Take the money, and if it flops, you just lost one friend.

If it does well, then you have a success.

There's no such thing as emotions/friendships when it comes to business.

~
But write a formal contract, saying that once you reach a certain profits. Drop your friend's capital, and give back what he gave you. Then you are left with a successful business and you take 100% revenue.

 

[delasoul]

Thanks a lot for all the opinions

 

[RichD]

Take the money. But you need to do a "debt" private placement.

Don't even waste your time pursuing "venture capital" or "angels" unless you have a track record or working prototype. Too many reasons to explain and not enough time here to go into. Just don't bother.

TAKE THE MONEY. ITS THERE.

But you HAVE to have the proper documentation to protect both you AND your friend and have a legal agreement. And even if you don't use the friend money, you STILL will need the documentation.

Ask questions before going further. Been there. Done it.

.....also wanted to add...

You need to do a LOT of prep work. Do you have an EIN number? Have you incorporated/formed an LLC? Do you know which is best for your plans? Will you need a business license for your state? If you plan to seek more investors outside your state, are you familiar with SEC regs and Blue Sky laws? Do you have an asset protection plan? Do you have an attorney?

There's more to "just doing it" than "going into business".

 

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[TK1]

You can read the Felix Dennis book How to get rich in order get to know know all the things about venture capital etc. VERY good chapter in this book about this particular situation

Take the money. But you need to do a "debt" private placement.

Don't even waste your time pursuing "venture capital" or "angels" unless you have a track record or working prototype. Too many reasons to explain and not enough time here to go into. Just don't bother.

TAKE THE MONEY. ITS THERE.

But you HAVE to have the proper documentation to protect both you AND your friend and have a legal agreement. And even if you don't use the friend money, you STILL will need the documentation.

Ask questions before going further. Been there. Done it.

.....also wanted to add...

You need to do a LOT of prep work. Do you have an EIN number? Have you incorporated/formed an LLC? Do you know which is best for your plans? Will you need a business license for your state? If you plan to seek more investors outside your state, are you familiar with SEC regs and Blue Sky laws? Do you have an asset protection plan? Do you have an attorney?

There's more to "just doing it" than "going into business".

 

[John C.]

Delasoul,

I have seen this question hundreds of times. Usually I get drawn in after the fact - when the partners are at each others throat.

Here are some things to think about. First I would want to know how much money you are talking about. If it is under $50,000 I can predict that you will regret taking on a partner once the business is operating at scale. So if you are talking about a relatively small amount, do it yourself.

Read the part of MJ's book when he says that "money will not cure money problems." My experience generally shows that folks use lack of money as an excuse rather than a reason. Often money in the bank can give you a false sense of security. You may not work as hard or dig deep enough for the right approach to a problem. Lack of money challenges you and makes you stay on budget. It makes you more creative and resourceful.

I have yet to meet any two friends who always had a good shared understanding of how to run the business, what to invest in, whether to expand, sell out, milk the cash cow. What I am saying is that you are both probably saying the same things but come from a different perspective. Which means that problems and disagreements will arise.

If you should decide to take on your friend as a partner, please take this advice. Plan your divorce before the marriage. That is, know that somewhere down the road, there will be a parting of the ways. It is much easier and much better to plan the split before you are deeply emotional about it. Agreeing how to split now will save you a ton of grief when the time does come.

Here is one approach which I have used successfully. One partner sets the price, the other can buy or sell at that price.

Hope this gives you something to think about.

 

[Rem]

Give your friend 5% equity of the business indefinitely BUT pay him 50% of net profits UNTIL his initial investment is paid off. Then drop him to the 5% understanding that he does not have any say or control of the business up front from the very beginning.

Then you have a 95/5 split. Usually arguments come when there are friends who are butting heads over control of the business. Some want to do it one way, while another thinks a different way is better. Try not to make it appear equal. Someone needs to be in charge and both parties know it. If not, you'll run into problems.

Good luck!!!

 

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[Rem]

Here is an article I was reading this morning written by Diane Kennedy about distributing net profits based on an LLC. If you happen to take any of my advice from the previous post you may find this helpful.

How LLCs Distribute Profit to Their Members | Legal Shelf Company