I’m starting a new business in the new year, I have a friend who is investing in it to help get me going quicker than planned. He’s quite happy just to give me the money with a promise that he’ll get it back at some point but I’d prefer to make it a little more official.

What’s best thing to do? Issue him £ shares equivalent to the £’s he invests??

I’ve ran a business before but never involved other parties…

Talk with an expert, as there are ‘shares’ and there are ‘shares’ – with many different rights etc.

+1 to that.

Non-voting share in the company. Take advice as to number, class and value of shares that you issue when you start up, can have implications later.

Good luck 🙂

I’d be speaking to an accountant/solicitor. If a friend invested in my business, and it was a success, I’d want him or her to see the benefit of his or her faith in me rather than just getting the money back plus interest.

If going Limited then preference shares with a fixed interest rate redeemable at par or option to purchase ordinary shares at a later date if you so wish

There are schemes whereby he can invest in a small/start-up company tax free. The shares have to be held for a minimum period (3 yrs I think), and there are restrictions on the types of business. Might be worth a look, a quick search of HMRC site will give enough detail to see if it would suit.

Rough value per annum will be 1 % over the bank interest will give (approx)
But paying off afterwards if all went well, then you will need to have your business valued
properly

Is he lending the money or is he taking part ownership of the business?

Are you going to set up a company to own and operate the business?

If it’s a loan, are you going to give him security over some sort of asset?

1. Know exactly what you want/are prepared to give up, discuss and write down every last detail of how this will work between you and your friend
2. Hope for the best but prepare for the worst
2. Go and see a decent solicitor and take advice and make sure it addresses every single concern you identified in your discussions

I honestly have lost track of the number of people I know who ended up losing out (sometimes everything) as a result of a form of partnership/investment with a friend/family member which turned sour or led to unexpected results.

Be cautious and focused on your business. Whilst it’s great that your friend is prepared to invest, once you have both agreed what his return should be, stop there and protect everything else.

Sorry if this sounds cynical, but you have absolutely no idea what the future holds for your business or your relationship with your friend.

I think you need go no further than taking peterfile’s advice.

How much are we talking? What type of company? Is he the only investor or will you need others?

If he is likely to face big tax bills or capital gains himself, he can essentially write off a huge proportion of the money he invests in you as long as you issue ordinary shares and he keeps them for 3 years. You would also have to spend the money quite quickly.

HugeStew hinted at this – its called SEIS. There is also EIS which allows you to raise much more for your business but the terms are less generous for the investor (still bloody good though!).

In certain circumstances, investors using SEIS can actually accrue more than 100% of their investment even if the business fails! You will have to attempt a valuation though to assign the correct / fair level of equity to him. Ignore all the “techniques” though – tell him what you think its worth, let him respond and then agree somewhere in between,

A loan is far simpler!

I think you need go no further than taking peterfile’s advice.

+1

You need the advice of an accountant for tax treatment (for you and your investor) and from a lawyer to structure the investment (equity or debt or something in between).

Both of these are worth spending some money on – better to have a short term PITA today, rather than a significant PITA in the future.

Shares are sharing the downside risk as well as the upside risk.

Loan is just that – it intends to get paid back no more no less (except interest) whatever happens.

What is your mates expectation? Is it that you will ‘see him right’ – i.e. he will get paid back regardless of how the business goes, but gets some bonus if it goes well? Which is best of both worlds and none of the ngative…..

What is your mates expectation? Is it that you will ‘see him right’ – i.e. he will get paid back regardless of how the business goes, but gets some bonus if it goes well?

it is exactly that!! He’s got confidence in me to get the business running and I’ve got confidence he won\t rip me off, but it’d be professional and prudent to protect each other??

it is exactly that!! He’s got confidence in me to get the business running and I’ve got confidence he won\t rip me off, but it’d be professional and prudent to protect each other??

It will protect your relationship with him too (i.e. helping avoid a fall out).

From what i’ve seen/experienced, most family/friend/acquaintance are happy to accept the downside risk associated with these types of less formal arrangement (e.g. I’ll give you the money but I acknowledge that if the business fails I might not get anything back). This risk is at the forefront of any investor’s mind, so the fact that he is prepared to invest on the terms you’ve mentioned suggests he has at least considered that risk (in principle at least!).

The greatest problem tends occurs when you look at who benefits from the upside (i.e. what if the business does far better than anticipated). This is rarely provided for at the time when the funds are put in.

To use a recent example which affected a friend of mine – he set up a business, a wealthy friend put in about £100,000 but wanted nothing to do with the business, only that he would be paid back £10,000 per year until the “loan” was repaid with interest. This wasn’t properly documented (the two were close friends).

The business ended up really taking off. The investing partner (he was considered a partner since the “loan” was never properly documented as such) felt aggrieved that he had taken all the risk and was now not seeing any real return on his investment, compared to what the business was earning. Despite the best efforts of my friend to offer a better deal/return/share, the investing partner took him to the cleaners and walked away with the majority of the business.

This whole sorry tale could have been avoided if proper documentation had been put in place at the time. But no one ever things about a fall out when everything is running smoothly and even fewer consider a fall out arising as a result of a business doing well!

Yes best to get something in writing, either with the help of a lawyer (could easily cost £100’s though) or just a letter between you, depends on your level of trust and comfort.

Shares and Loan are very different.

The best for you would be a loan made to the business – from your original post he’s not expecting any interest. If would seem fair to pay him something on top however.

Giving him shares is really quite a valuable for him potentially but shares are not normally “repaid” like a loan, they can be sold or you can agree to buy them back. To be honest I think you want a loan.

Most banks would want a loan secured on something and with a personal guaranty from you (and secured on your house for example)

Commercial interest rates for this type of loan could easily be 8%-10% as its pretty risky, new business start up. It’s quite possible without a personal guaranty from you no loan would be available at all.

@peterfile – that’s nightmare story !