Would you invest in this deal? All the risk, no ownership, and a profit cap, to boot!

By | October 26, 2009

Tyler’s looking for some ‘suckers’ who are willing to be investors for his latest project, a Flash based site. The terms are weird:

I am basing the following options on the project costing $5,000:

Investment Return Buyout

$1,000 15% for 18 months 5x
$2,500 37.5% for 18 months 5x
$5,000 75% for 18 months 5x

I will only accept investors up to when the cost of the project is met (Ex. If 2 investors want in at the $2,500 level then it will be closed there).

The Return is based on site income, whether it be from advertisements on the site or paid memberships.

If you do the math, the site would need to make a total of $6,666 (bad omen? haha) during the first 18-months in order for you just to break even. This works out to an average of $370 a month. Therefore, if the site manages to make $13k during the first year-and-a-half, you’ve doubled your investment.

There will be a buyout clause, where at any point I can buyout the shareholder for 5x their investment. This buyout will be on top of any return they have received so far. For example, if an investor invests $1,000 and after 5 months I want to buy them out, they will keep whatever Returns they have made so far, plus $5,000 (5x) for the buyout.

The 18-month Return timeframe will begin once the site is finished its development and goes live to the public. (More)

I can’t understand this at all, Tyler.

Are you borrowing the money or asking for an investor? Really. If you are borrowing you should offer repayments as part of the plan, a potential interest rate to evaluate the risk involved.

If you’re looking for an investor, then you really ought to be looking for someone who can bring both cash and expertise (ideally). If not expertise, at least cash. But then you must sell them part ownership.

Are you looking for a payment from future cashflow? Then if so, what is your security?

I can’t understand, from a potential client’s position, what you are looking for, nor can I see any real reason to invest. You don’t cap my risk, but you cap my profits. It really seems like you want to have your cake and eat it, with respect. If I were doing this, I would cap the risk, so my investor’s feel better, and reduce/remove the cap on the profits. Given your situation, though, the relative small size of the investment, why don’t you just pony up the money yourself, and avoid all this hassle?

If I were a BBC Dragon, and if I had to listen to this, I would reject it out of hand for the reasons outlined. There’s no product to showcase, no example, no cashflow projections other than airy-fairy numbers, no estimates of expenses (server costs, design costs, admin costs), no security for investors (not even partial ownership), nor do you even clarify if the return of capital comes from income or after costs.

So what is this? I would love to know. Let me know.

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