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Options for an Investor Arrangement

Including an investor in your company’s funding picture is open to many different options, following are a few scenarios a company might consider.


Dividends

Starting in the third year following the investment, the company will pay to the investor a dividend. Dividends will be shared among all investors on a prorated basis.  The amount of the dividend will be determined by the board of directors, but in no event will total dividends issued reduce the fiscal year end cash ratio to less than .75.


Investor Redemption

Investor redemption is based on a pre-defined schedule; beginning in the third year after investment the investor will have the right to redeem their equity to the extent that the company’s cash ratio can be maintained at or above .6.  If more than one investor wishes to redeem their equity it will be done on a prorated basis.


Redemption can be based on the following schedule.

Year One

125% of original investment which is equal to a 10% internal rate of return

Year Four

190% of original investment which is equal to an 18% internal rate of return

Year Five

250% of original investment which is equal to a 21% internal rate of return


Enterprise Buyout

Enterprise buyout of investors is based on a pre-defined schedule; beginning in the third year after investment the company will have the right to buy back the investor's equity at a pre-determined price.


Buy back will be based on the following schedule.

Year Three

400% of original investment, equal to a 60% internal rate of return

Year Four

600% of original investment, equal to a 57% internal rate of return

Year Five

800% of original investment, equal to a 52% internal rate of return.


Convertible Note

An alternative to a direct investment is a loan from an investor.  A specified interest rate would be defined with payments due at regular intervals over the term of the loan.  The investor would have the option to convert the loan to a percentage interest in the company for a pre-defined period of time.