How to structure a deal between partners and investors?

Question

I have a question that may or may not have a one size fits all answer, but here goes. My partners and I are looking at a deal that will require us to round up investors. We are planning to target family and friends. We aren’t quite sure how to structure the deal, though. Assuming the original partners (me and two other guys) take x% and set aside the remaining x% that will go to our investors – what are the typical percentages for each?

Or is there a better way of dividing up profits when brining on investors?

I would love to hear people’s experiences, please.

Or is there a better way of dividing up profits when brining on investors?

I would love to hear people’s experiences, please.

Moses K. · Answer

I would probably go this route as well. Having equity partners can be a little tricky. Promissory note secured by a deed of trust. Get a third party involved as the trustee. A good title company should be able to take care of this for you.

Jesse Waters · Answer

@Paul Tanso May business partner and I have been dealing with the same issue, how to partner with people & how to account for it.  My first source for seeking help was my accountant.  We are good friends apart from doing business and she said it was possible to add people as "partners" based on the equity they added, but it would be as a general partner in the business and not specific to one property or another.  She said we could try and keep track of their equity share limited to a particular property, but she told me our accounting bill would go through the roof.  I took that as a simple answer, of don't even think about trying it.

The best solution that I have heard of is taking "loans" from people as @Arlan Potter mentioned.  The broad stock market preforms at 8% average (so we are told & expected to believe.)  Currently you are lucky to get 0.25% in a savings account, and CD's are at 2% (maybe).  I think taking loans at 7-8% interest payments monthly, with the full principle either rolled over or paid back in 3-5 years is a great deal for folks, easier on your accountant & allows you to maintain control of your business & get the extra capital you need.

Arlan Potter · Answer

1 person - yourself  - easy

2 persons - nightmare starting to happen

Many persons - zombie apocalypse.

I have a couple of partners for certain deals. They "Loan" me money. I pay interest - 8% -monthly checks. principal in 36 months, or roll over.

Arlan Potter · Answer

I have a standard promissory note and a Mortgage doc that I sign and file at the courthouse. No title company, or lawyers.

The mortgage is for their peace of mind that the loan is secure. I would, however, sell l everything, (including my kids, just kidding) before I would default on these people(family and friends) that loan to me.

Paul Tanso · Answer

@Arlan Potter cool idea. How do you issue a firs mortgage to lenders? It his  technique for when the lender wants more security?

Arlan Potter · Answer

What I do is I use my free and clear properties. I will give the loaner a first mortgage on one of my properties. I use the money elsewhere. It saves me from graveling from banks for every deal that comes along.

Clay Manship · Answer

@Arlan Potter

I am assuming the debt you are issuing to your investors is unsecured...correct? If anything, you have one person or LLC that has the first lien on the property, as they funded it's purchase, and you have another person or persons issuing debt for a second lien position, or even unsecured.

What are you doing?

Arlan Potter · Answer

That is what I would do.  There are a ton of folks with money sitting in CD's making nothing. They will jump at the chance to make 8% per year. Interest payments monthly.

Paul Tanso · Answer

Ha! I typically agree regarding partnerships. In this case we've been working together well, and we are long time friends with aligned expectations. We formed an LLC to do flips together where we were able to use our own cash. We recently came across a big deal that we do not want to pass up.

In terms of investors - we were told the same thing by our lawyer - take "loans" do not add partners, so that is what we are thinking in this situation. So you say pay each person that loans us money 8% monthly, then the entire principal in x amount of time?

How to structure a deal between partners and investors?

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