How to structure new startup with multiple small investors

Discussion in 'Starting a Business' started by ProBusiness, Mar 1, 2012.

  1. ProBusiness

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    Mar 1, 2012
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    As a quick background I am a Sr Financial Analyst and also teach adjunct at a nearby college (Economics and Statistics). I also have an MBA and a Master of Arts in Applied Economics. I state that info only to let you know I have a strong business background as well and have two small businesses already.

    However, I have a new idea related to Education. I put together a Proforma Income Statement (both a 12 month and a 5 year) to determine the viability of my idea using very very conservative numbers. In other words the possibility of losing money is minimal but could shut down in 3 years if not profitable and the total losses would be about $30,000 (worst case scenario). I won't talk "best case" scenarios as the probability of that is not likely (but I can hope:)!!). The most likely result is a profitable business that can quickly be expanded at a fairly low cost into a 2nd, 3rd, and 4th location. These would be in college "towns" so the number of potential locations are numerous around the country (and possibly a "franchise" opportunity down the road? But I digress).

    I have put together Proforma income statements, 12 month and 5 year plans, PowerPoint slides explaining the business model and potential, have put together a business plan with overviews, market analysis, sales and marketing plans, competitive analysis, and so on. In summary, I have had this idea for about 2 years and about 3 months ago starting putting all this information together. With $75,000 I can start the first location right and see a lot of potential. Since it is in the education field I have been showing my idea and business plan to multiple professors and instructors and they are amazed at why they never thought about this idea and it is great. I currently have about 25 professors and instructors interested in investing $1000 each into the project. My thoughts now are if I can simply get 75 total individuals to each invest $1000 I would have the seed capital to open the first location. And since this is in a related education field I am confident I can find another 45 professors or instructors to invest.

    So here is my question: I am not sure how this business would be set up? I have never owned a company that was incorporated with shares of stock (my two current businesses are LLC's). I am hearing that giving stock for investment dollars is very tricky and there are some issues with that? Just promising a percent of the company for the $1000 investment is not that "easy"? But I would rather give equity where we all benefit from the growth rather than borrowing the money that affects the Income Statement and Cash Flows. I would rather give equity and, quite frankly, they want equity too. They invest a relatively small amount ($1000) but if this develops as planned in 5 or 10 years they will have significant additional value. How would you propose is the best way to set up a company with many many small investors (about 75 small investors)?

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