Equity vs Loan for Start-Up

[greenz]

Whats going on fellas. I'm about to launch my website and i choose to not take out a loan on my crib vs asking relatives for money. So my parents are willing to invest but im struggling with how they should be compensated. I've been reading a-lot about Loan vs Equity as the two most common practices for dealing with financing for early start-ups. I already setup the LLC and wanted to gauge some feedback on how to approach the financing part. I want to offer them equity because in the long run when the business becomes successful we all win but as part of that should i still guarantee their loan? My terms would be somewhere along the line of 1 year grace period with followed by 6 months to a year interest payments then a balloon if the site isn't generating the right amount of funds. I'd figure this way they are still equity owners but im not leaving them out in the dust if things fall apart.

I would break down the equity has followed

74% - Me
6% - Them
20 % - Optional

This seems to be a common balance i've found throughout my reading but my other question is who owns that optional 20% would it be me?

Also while i dont want to waste money on a lawyer to draft this agreement couldn't i just take the cheap route and use legalzoom. Down the road i do want more investors and having everything setup correctly now will cause me less headaches down the road. I could just make a p note with the terms and everything but that doesn't seem like the best route.

The last question i have is in regards to balance sheets anybody got any good articles on how to create one / what all the terms mean and the breakdown. I've googled and found some templates and inc.com had a great article but they all seems to be for bigger well established companies not start-ups that dont have with alot of those items.

 

[incogneg]

Whats going on fellas. I'm about to launch my website and i choose to not take out a loan on my crib vs asking relatives for money. So my parents are willing to invest but im struggling with how they should be compensated. I've been reading a-lot about Loan vs Equity as the two most common practices for dealing with financing for early start-ups. I already setup the LLC and wanted to gauge some feedback on how to approach the financing part. I want to offer them equity because in the long run when the business becomes successful we all win but as part of that should i still guarantee their loan? My terms would be somewhere along the line of 1 year grace period with followed by 6 months to a year interest payments then a balloon if the site isn't generating the right amount of funds. I'd figure this way they are still equity owners but im not leaving them out in the dust if things fall apart.

I would break down the equity has followed

74% - Me
6% - Them
20 % - Optional

This seems to be a common balance i've found throughout my reading but my other question is who owns that optional 20% would it be me?

Also while i dont want to waste money on a lawyer to draft this agreement couldn't i just take the cheap route and use legalzoom. Down the road i do want more investors and having everything setup correctly now will cause me less headaches down the road. I could just make a p note with the terms and everything but that doesn't seem like the best route.

The last question i have is in regards to balance sheets anybody got any good articles on how to create one / what all the terms mean and the breakdown. I've googled and found some templates and inc.com had a great article but they all seems to be for bigger well established companies not start-ups that dont have with alot of those items.

Before I begin I understand that investors are parents, but practice now for how it should be depending on growth... If this is your first one, odds say failure, but you can learn a lot from it... Ok, now other thoughts...

Don't be penny wise and dollar foolish... You're talking about distributing equity stakes without help of a lawyer, but doesn't seem that you have a proforma... What are your 5 year projections on value, whats equity going to be worth, whats biz growth estimation plan... If you don't have a biz development background I'd suggest starting to draft a biz plan... you can google sites that have sample biz plans for free... Also if you have things fleshed out it's a great step towards what you really need-- other people's money!

Every businessman needs a lawyer and an accountant... Although you want to mininmize expenses until you start making real money, find some cheaper alternatives for now... But NEVER create contracts that reference partnerships, equity and future earnings without a lawyer...

Good Luck!!!