I have a client who called me saying he wanted to bring in an investor who is contributing $150,000 to my client’s LLC. Once a particular project is done a few years down the road, that investor gets their money back. My client was so confident that he would do well, that he guaranteed the investor a 12% return on the investment. And not just a friendly verbal guarantee. My client was willing to put it in writing and pay it annually.
To my client, this person coming in was an investor and would own part of my client’s LLC. But I asked him, “So this guy gives you $150,000. For one year he gets nothing. But after that you guarantee him a payment of 12% of his investment, paid annually. After five years, you can pay it off or just keep paying his return of 12% each year. Right?”
“Yes, that’s exactly right.”
“Okay, well…. that sounds to me like a loan. Not an equity investment. Do you mind if I just document it as a promissory note?” His response was funny. “Yeah, I don’t care.” That response sounds so informal, but it’s actually the best possible perspective to take. So many entrepreneurs pour over industry terminology to the point that they are experts at investment jargon, perhaps more than being an expert at earning a profit.
I’m not saying this is a total waste of time. It’s important to know some technicalities on how investments are structured. And it helps to speak the language when dealing with VC and other investors. But an investor generally doesn’t care if you don’t know the securities industry lingo inside and out. The investor wants to know that you know how to make money in your business.
My client is the perfect example. While his competitors were out there reading yet another copy of Fortune cover-to-cover, my client found a guy willing to part with $150,000 without even realizing that the investment he scored was a loan. Who cares? He scored a deal. It’s my job to sort out the details, figure out how to label it, and document the deal. My client just spends his time knocking down more and more deals.
If you find yourself spending more time becoming an expert on investing lingo as you do actually attracting investors, you may want to back off from the jargon for a bit and focus on some old-fashioned deal-making regardless of what your lawyer ends up calling the document that comes out of it.
Go make today amazing,