In 2015 I had just purchased my first house. I got a killer deal on it. I was making some decent rental income and decided that rental income was the best thing since ice cream, so I started looking for more rental income. Since I got such a good deal on the house, I took a little of the equity out to use for my next investment. Then I started asking people in my network if they knew of any good investment deals. I had a real estate deal in mind, but what I found was so much better.
After asking a friend of mine if he knew of any good deals, he introduced me to the top guys at a healthcare and nutritional company start up. I could spend plenty of time telling you about how awesome the company is, but it’s probably better if I provide some resources directly to their site.
After a quick conference call, it was clear to me that this was a good deal. Why was it a good deal? How can one tell ahead of time? There are a lot of answers to those questions; but here are a few my reasons to give you some insight.
Reason 1: Virtually No Risk
The biggest reason this was a good deal, is because there was virtually no risk. On the surface, it may not appear that way. But with the right mindset, these kinds of deals are easy to spot. Reasons 2 and 3 are contributing factors to why I say there was virtually no risk.
Reason 2: The Loan
The owners agreed that my investment in their company would be in the form of a loan. Why is a loan less risky? Loans have to be paid back. If I had just purchased equity, I may never get a single cent back. Equity doesn't mean you will get a return on your investment, equity is the ownership of something. If you own part of a startup or a failing business, there is no guarantee that you'll ever make any money for owning it. In this deal, the loan was to be paid back after 3 years at a higher interest rate than you will see on most mutual funds or 401(k)s. Of course there is always the risk that the loan would not be repaid, but that risk was further mitigated by Reason 3.
Reason 3: The Guarantee
The owners also personally guaranteed that I would be repaid. This means that even if the business fails, each of them are still individually responsible to repay me. Of course I hope that it would never come down to that, but if it did, I was protected. A personal guarantee is the kind of guarantee that most people have to sign on a personal loan that has no collateral. On a car loan, the car is the collateral. On a personal loan, your personal guarantee is considered the collateral. Usually on a personal guarantee, the person making the guarantee would have to pay the lender by any means possible, including putting a lien on their house. For more on liens, read my article What is a lien?
Reason 4: The Equity Option
The previous reasons are primarily concerned with risk mitigation. Reason 4 is more about return on investment, or how much money I would make. As additional consideration to make the deal more attractive to investors, the owners were also willing to offer the option to purchase a very small amount of equity in their company at a steep discount if certain conditions were met. For more on options, read my article What is an Option?
In the case of this deal, the option specified that I could purchase a very small amount of equity for $1 if I loaned a certain amount of money and exercised my option to purchase after one (1) year. Why not give me the equity the day I make the loan? Well for a few reasons most likely. If I have to wait, there's always a chance that I'll forget to exercise my option a year later. I am also not entitled to any profits during that time, which is better for the owners since they are a growing startup.
At the writing of this article the 3 years have not yet expired for this loan. The loan is to be paid back in approximately 9 months, with interest. I have already exercised my option to purchase equity in the company for $1, so I now own a small portion of the company. This company is currently valued between $20M and $35M depending on how the math is done. Please see my contact page if you want to know more about doing a deal with me or someone in my network.
10/31/2022 03:02:57 am
Great blog, thanks for posting this.
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Sheridan's interests are in technology, business, music, and adventures