How to split profits and fees?

[Matt Hunt]

Hello all, I have started an investment company that specializes in flipping houses and I have a group of investors that are fronting the capital for the projects. I am doing a split with them based on the % they have into the deals. In the beg. I am taking a $6k/month draw to cover my expenses and time invested into running the business. This amount will come out of the company money funded by the investors. My question is what is the best possible way to to get that money recovered for the investors? For example, if it takes 3 months to finish the first deal, that's $18K gone. And once the profit is made, there is no way I can put the $18K back, pay out back to the investors their ROI and still have enough left to pay myself. Anyone had a similar situation or advice? Much appreciated!

[Dion DePaoli]

The topics that concern me here that are not really being addressed are the managerial and administrative responsibilities you will have. It does not appear these areas are your strength and in some sense you have zero experience with.

Being candid and no disrespect meant, you are equating your efforts of 100% of the work to transaction/project management. It seems you have experience doing this part and it seems the investors are comfortable with your involvement of that side of the business. Great. You need to get some more education on the administrative and managerial side of the business.

The general description and eagerness of your capital structure is quickly approaching Regulation D situations. Its not clear how many investors you have obtained or how much capital you have on call but the tone I get from the post makes me want to raise this flag. All that said, its a good thing to have investors and money but you have to do it correctly or get sued or worse.

Administratively you need to gain an understanding of how you will take your investors capital in and how you will deploy it. Is there a managing company which you own and then a fund type entity the investor invest in and then does the fund type entity hold title to the assets or do you setup new companies to do that?
Or does your company take the money in from your investors, which means they become members or partners of the pseudo parent corporation and if in this manner are you truly shielding your investors from liability as best you can/should?

Will you call for investments on a pro rata basis fund structure or on a project by project basis?
How many investors do you plan on having to use in the structure?
What are your qualifications of an investor? Can old man Bill give you his savings of $50K?
How long is an investor required to hold his committed capital to you before the commitment rescind? What is the penalty if you call on the capital and it is not available?
Do you hold any portion of the capital like 10%? If so, how and where?

The capital commitments you have, is that in some form of documented capital call paperwork or subscription document?

Are you properly disclosing the investment opportunity to your investors and are you properly soliciting investors for your investment program?

Taking on investors and leveraging their equity without proper disclosure (a.k.a. getting hard money loans) can open you up to liability from your investors.

How and when will you report to your investors?

For the sake of not making this an exhaustive list I will stop there. It is possible that I have read too far into this but I am posting based on what is running through my mind as I read this post. There is a bit of a different demeanor to the manner in which you are approaching getting started opposed to the typical newbie. Some of that may stem from the success you had in your previous role at the company you left. Your approach to your experience is admirable but I can tell you you will soon learn why you never say stupid things such as "...not a single one of them have ever lost money nor even missed their target ROI from my direction". I can't tell you how bad of a statement that is and if you have an attorney his head is spinning like the Exorcist right now.

I am not trying to take the wind out of your sails or pick on your ideas or experience. I am trying to point out what seems to be evident is that you need to take some time and become versed in administrative and managerial side of investing and raising capital. Those actions are regulated and monitored activities in the United States. Additionally, you have a learning curve on tax implications and investment structures. Again, not to pick on you but you had a misunderstanding that an investor gets a 1099 instead of a K-1. That seems harmless perhaps to you, but it is sort a big deal as they are not really close to the same thing.

As I stated, I could be off in left filed but I get a sense you want to go 1 million miles in 10 seconds but you don't really have the experience to do that just yet. The best advice I can say is slow down and make sure you are doing things right and be concerned about what you don't know and less about what you do know. That detail can mean the difference between success and failure as well as litigation and prosperity.