Learn Me: Investing in a Startup (that you work for)

The brewery where I work is a startup. I currently have more liquid cash in reserve than the owner does. He is looking for more people to invest to handle some of the cash flow issues at the moment. I'm figuring I can drop a healthy chunk down.

What I don't know is how to determine what is a good value for me to purchase stock at. I figure I should be able to negotiate something a bit better than what is being offered to other investors, because I am in a critical role in the company, and it would be good business sense for me to have some skin in the game.

Not sure if it makes sense to ask for a lower price than general public, or to try to negotiate something like locking in the current rate, but the option to have a portion deducted from my paycheck and/or receive my yearly bonus in stock rather than cash.

What percentage of the business will you be buying? What is the outstanding pool of stock? What are the chances that more shares will be issued in the future that dilute your shares?
Small companies aren't usually terribly liquid so pricing a buy in is difficult. You need to look at hard assets and cash flow and future dividends and lots of stuff.

A couple of almost unrelated points:

• Get professional help - no, not that kind - to evaluate the contract and to help valuing the business
• If we're talking shares in the business here, make sure that you have provisions in the contract that at least allow you to invest in later funding rounds so you can keep your equity levels up if you want to. Watch out for your share being diluted in unreasonable ways
• Make sure that you have an agreement in writing what happens to your shares if you decide to leave and the brewery hasn't gone public by then - do they have to buy you out, do you get/retain a seat on the board or what?
• Figure out what role you have after the investment. Are you just a "money man" who put in some money? Do you expect an active role in running the business over and above your current role?
• Are there any other investors? If so, what are their expectations?

There's more, but those are the first few things that come to mind.

Oh, and most importantly - how pissed would you be if the value of your investment goes to zero?

Okay, I'm new to this whole investing thing, so it is confusing to me. The buy in isn't actually in "shares" but in strait up percent ownership. Like $XX,000 gets you 1% ownership. I would be buying anywhere from 1/5% up to 1% at this time based on what he's saying the price is to buy in. The owner's goal is to protect his 51% ownership going into the future, and he currently has 61%. There are multiple outside investors who own that 39%.

I'm going to have a meeting in Monday afternoon with the owner and the guy who is the largest investor and also sort of like an acting CFO for the brewery.

I don't know much about pricing a buy in. I have a solid understanding of what the equipment in house is worth (and brewing equipment is a saleable asset), know the inventory, and have a solid sense of what the gross sales are. I do not know the full details of the books as far as how much debt the company has or even really what payroll expenses are. Knowing that... I still have no clue how to valuate a company like this. He is asking $25k/1%, and says he thinks it should be more and plans to bump that number up in the spring to $30k-$35k if he needs more funds then. Which means he's valuing the company at $2.5 million now. I have no idea if that makes sense or not.

If the amount of my investment went to Zero, I would be more pissed off about the collapse of a company that I feel emotionally invested in than by the loss of money.

Investing in the company you work for, Why not to do it: (same as IRA/401k, etc.) If the company goes tits-up, you not only lose your job, you lose your savings too. Think "Enron." If you don't know what "Enron" was, then google-fu it up. The people there really believed in the company. Had all their retirement money in it, etc. Went to zero overnight. Pow. Wanna play again?

Now, in this case, you ask yourself: If this company is good enough to invest in, why do they need money? Why do they need money from you? I would be wanting to see The Real Books, tax returns, everything if there was more than 2 zeros in this endeavor.

In reply to Dr. Hess:

I'm familiar with Enron. I'm definitely not going to put all my eggs in one basket. Diversifying is smart.

They need the money because it's a startup and they need cash to pay down the cost of building improvements and to purchase raw materials for beer production.

Done this twice. Sweat equity and share options are my preferred method. Don't ask me why, but I am more comfy working at a discount than putting existing money into an unknown venture.

It is all about the exit strategy: How do you cash out? Who determines what your share is worth if you want to leave?If you have to leave? What if you are fired? What if the boss dies? What if he divorces?

A big one to consider is liability. In a partnership, you can be jointly liable for any debts. If the E36 M3 hits the fan, the bank does not care if you are a 1% owner or 100%, if they see you have money, they go for it. Make damn sure this is addressed in the contract and that your lawyer says you are safe if you feel you should be.

And unless things have changed, tons of brewery equipment on the market. Still ten cents on the dollar at liquidation especially since it has large moving, storage and install cost.

The bottom line is that star-ups are long odds gambles. If you like to gamble and can afford to lose, then it is a great game. Huge motivator for doing your best to make it work.

Another option that might work for both of you is to do a 2 year bubble loan: Take a nice interest rate with the principal due in two years. At that point the principle is paid or a penalty clause can invoke shares or some other form of recompense. Called creative financing for a reason. Course if they go broke you lose!

FYI. In neither case did I get rich. Got my money plus a bit back and kept on trucking to the next adventure.

Beer Baron wrote: They need the money because it's a startup and they need cash to pay down the cost of building improvements and to purchase raw materials for beer production.

The latter scares me. The former, not so much although "paying down" suggests there are loans in play also, which will/should have an effect on the valuation.. You definitely want to get the full financial picture and have it gone over by a proper accountant of your choosing.

There are loans. Not sure the full extent of them. I know money is somewhat tight right now with trying to figure out what things get paid off first as money comes in from sales, but I don't actually know how tight. Purchasing raw materials needs to be done and will be done. It just gets done in occasional big orders (like 2-3 pallets of malt to cover the next 4-6 weeks), rather than a constant small stream.

Definitely look into the loans, I was looking at buying into a club in Oz, we did our due diligence and located a substantial loan that we were not advised about, we would have spent $250K to buy another $250K loan if we had not been cautious.

Not saying this is your case but we did not expect this owner to be a liar either.

$2.5 million. The company should be growing in value or producing extra cash that's something like 5% of that a year, minimum. A little math says that's $125k. It should be relatively easy (maybe) to assess equipment/property/sales to come up with a value. I've met very few small business owners who have a realistic idea of what their business is worth. I watched my dad buy a business that returned him less than 2% on his investment when it was running well. He would have been better off buying bonds. That's a situation you don't want to find yourself in.
My experience was investing in a restaurant that became a family drama that folded and took everyone's money along with it. As soon as the business became profitable everyone felt they deserved the overrun and things descended into hell.
Be careful.

Datsun1500 wrote: I guess the easiest piece of advice I can give is this: any business that is struggling this much with cash flow is not worth anywhere close to $2.5MM. Your $25k is just a quick fix, for now.

I'm going to agree with this.

Datsun1500 wrote: I guess the easiest piece of advice I can give is this: any business that is struggling this much with cash flow is not worth anywhere close to $2.5MM. Your $25k is just a quick fix, for now.

Yeah... I'm going to have to ask about looking more closely at the actual financial situation. Maybe reevaluate when cash flow is more positive and we're just at the point of wanting to raise funds to invest in new fermenters or expanding the space.

Thoughts...

1. Agreed with "Why does a $2.5M company need to trade equity for $25k?"
2. Agreed with "How do I get my money back?" This isn't the NYSE where you can just sell when you tire of it. Typically the only options are "make anywhere from some to a lot when we are bought out" or "lose it all when we fold".

The best way to "invest" in a brew business is to buy the beer.

For every one of these fly-by-night flavor of the month operations that gets bought by In-Bev there are 100 that sell everything on CL within 5 years.

Beer is over. Make bourbon. Cook with weed.

I should also say, I asked him about if he was looking for more investment, not vice versa. I know he's putting together people who will be interested in investing in the near future, but I'm pretty sure that money is going to be to cover the next row of fermentation tanks that we're going to need early next year to cover increased production demand.

We've only had our beer out on the market for a bit less than 2 months now. Demand has not yet caught up with our production capacities which is one of the reasons money is tight. But it is not going to be long before it does catch up.

Run away.

The only thing pegging the value of this company at $2.5 million is because the owner says so.

You can't determine a company's value without ANY understanding whatsoever of it's debts.

Who says he hasn't borrowed $4 million? Then it has a negative value.

Just because you see a lot of brewing equipment sitting there doesn't mean it has a cash value. It is HIGHLY likely every bit of it was financed, through many different sources that are hard to assess. He borrowed against his bank capital line until it was maxed, then financed equipment purchases from the vendors, then was slow in paying low priority suppliers, then put some on his wife's credit card.

Plus, used equipment is worth no more than $.10 on the dollar.

He is not selling value. He is asking you to share in his indebtedness.

He is trying to borrow from you because the bank (who is more qualified and experienced at assessing value than you are) won't lend him any more. Trust them.

I once bought another man's debt in the form of a coffee shop. Never more.

If you'd like me to prove my point, I can. Take it to the next level, and tell him you are interested, but need more facts. I GUARANTEE the next document he will supply you with is an equipment list. It will show model numbers, purchase prices, and values. It will look very impressive, and show a bottom line of the equipment value at or around the $2.5 million. This document is fake. Well, OK, it's not fake, but it is highly speculative, and optimistic. There are no established guidelines for creating such a list, and it is a standard practice for trying to impress a bank. Call an equipment vendor and ask them for a quote sight unseen.

If that is not enough and you want more proof, hire a forensic accountant. They will give you the same answer (with more facts to back them up). Their fee will be a small insurance for such an investment.

I would avoid it from your description. It sounds like you are small potatoes and like mentioned above, you are a bandaid at most.

If you decide to do it, bring in an outside person who is not emotionally invested in the company and who can look critically at the company, and their business practices. Usually cash flow issues are there for a reason and you need to find out what that is, and if it is getting addressed.

Also do you REALLY trust the owner? Are you okay linking up with him and his investor long term? Similar philosophy, vision,etc got the company? Is he responsible, ethical, etc? Does he have a history of investors/partners coming and going? Live an expensive lifestyle?

I worked for a company that had severe cash flow issues...all tied to the owner's lifestyle so I am a bit jaded...

Beer Baron wrote: We've only had our beer out on the market for a bit less than 2 months now. Demand has not yet caught up with our production capacities which is one of the reasons money is tight.

Another way to say that is "It's much too early to identify our actual market, or what the demand for our product will be, or what our revenues will be".

2 months is nothing.

Giant Purple Snorklewacker wrote: The best way to "invest" in a brew business is to buy the beer. For every one of these fly-by-night flavor of the month operations that gets bought by In-Bev there are 100 that sell everything on CL within 5 years. Beer is over. Make bourbon. Cook with weed.

Buy the beer? I'm the one who is physically making all of the beer.

This isn't a fly-by-night. We are coming in with more brewing education and practical experience than any of the other craft breweries that have started up in the past 5 years in a large metropolitan area that has been lacking breweries and is seeing a massive boom right now. Our product is solid, unique for the market, and not gimmicky.

Beer Baron wrote:

Giant Purple Snorklewacker wrote: The best way to "invest" in a brew business is to buy the beer. For every one of these fly-by-night flavor of the month operations that gets bought by In-Bev there are 100 that sell everything on CL within 5 years. Beer is over. Make bourbon. Cook with weed.

Buy the beer? I'm the one who is physically making all of the beer. This isn't a fly-by-night. We are coming in with more brewing education and practical experience than any of the other craft breweries that have started up in the past 5 years in a large metropolitan area that has been lacking breweries and is seeing a massive boom right now. Our product is solid, unique for the market, and not gimmicky.

Beer was "new" in 2000. Every dick -n- harry hipster with two pennies to rub together is making the "best" beer EVAR. Backup plans... best tattoo parlor EVAR or best "man" barber shop EVAR!

You actually can be making better beer than all the others but... too late. The buying public is fickle. There are 200 beers on the menu at every bar I go to now. Too much product, too little market. No one is trying the super-double-fipple pumpkin backflip hop walloper at $9 anymore. It's over.

The fact that your capacity exceeds your orders is not a "jump in" moment on the Shark Tank. Beer is marketing not quality in a volume market. 1% of customers care about beer. The rest look for one taste of the new guy on the tap handles and then buy miller lite for the rest of the night. Spend the $ on logos and labels. No kidding. You need to be selling lifestyle like Harley does. They make more on apparel than bikes. Think about that. Then... make some sweet syrup with THC. That is the new beer.

Brewing experience does not necessarily equate to business experience.

It still could be a fly-by-night (no offense).

You haven't said a word about the owner's business experience. That's bad.

Here is what I would want to hear before investing:

"The company has a great amount of skill and knowledge about the product, but more importantly, the owner is a crackerjack businessman. He has taken 4 different startups in 3 different industries to great success, and has decades worth of business contacts. Everyone who has invested in him has doubled their money. Even better, he has a huge understanding of the legalities of introducing our new product in multiple markets, interstate commerce issues, and has served on the advisory board for the Bureau of A,T, and F".

Or something like that...

In reply to SVreX:

He is a brewer first and businessman second. He has surrounded himself with investors who are businessmen and have been quite successful with that. He listens to their guidance while he handles the grunt work of running a business.

As I've tried to point out. I am the one approaching him to look into the possibilities rather than the other way around. I will be meeting with him and the largest investor and guy with the most business sense tomorrow afternoon to look at more details. That is why I'm coming here for advice to know what to ask when I do meet to discuss the possibilities.

Well, ask for the financials.

No-go without detailed info on the debt.

Don't fall in love with him because he is a brewer. Your thread title was about investing, not brewing.

I love builders. I relate to them. But I need businessmen with business experience to handle my investments.

So... with the plan of going into the first meeting. I'm trying to put together a list of things to go over:

The first order of business for me will to be able to figure out what a proper value for the company is.

Figure out assets, debt, expenses, sales, etc.

Get an understanding of what my investment in the company actually gets me. How do I make my money back if I invest? How do I get out? What happens if I leave?

What is my liability if something happens to the company?

I do feel pretty confident about getting a strait answer from him. Much like me, he is the type who is honest to a fault. I have a pretty good understanding of what the teething issues are because he talks pretty openly about them with us managers immediately below him.

I am the one approaching him about opportunities for investing, not him looking to me for a quick cash infusion. I am a DINK who has been fortunate with inheritance and has no debt.

And I'm not looking to invest $25k now. I don't have that much I'd be comfortable losing. I'm looking to invest like $5k cash soon and then have an option to get some more just in sweat equity.