I am in the early stages of planning to open my own brewery with a couple of friends. We are vetting out the details and starting the business plan. While we will be investing some of our own money, we are looking to get a majority of the initial funding from other sources. I thought the plan Dick Cantwell used for Elysian as detailed in the BA’s Guide to Starting Your Own Brewery sounded like a reasonable starting point. Get a significant portion from equity investors while having the three of us still retain majority voting rights of the remaining shares. Then approach the bank for the rest of the necessary funds.
The one piece I am currently trying to figure out is what is a reasonable and expected return on investment for the equity investors would be. I have some ideas on percentages and time frames, but won’t share them yet for fear of steering the answers a certain way.
There’s not an easy answer here because it depends on who you are trying to court as investors. If you are targeting venture capitalists or angel investors you can expect to target 30-40% ROI. You might be able to adjust that number up or down depending upon the equity design and the non-monetary pieces of the equity (e.g. management control, preferences). If you are shopping around friends and family for equity investments then you are probably targeting a lower ROI. I would venture a guess that you might be able to convince people to buy equity at an ROI as good or better than what the stock market is returning.
Initially we’re targeting family, friends, and friends of friends. My concern with venture capitalists is that we would potentially be giving up too much control and ownership in the business.
The way I wrote our Operating Agreement, dividends are paid proportionally after the managers allocate funds for the next fiscal year. If you have to pay a guaranteed ROI to investors, that’s essentially a loan but with much higher interest.
Wasn’t thinking so much a fixed ROI like a percentage on their investment. Definitely more like dividends that we would pay out after business needs and expenses are taken care of. And set the expectation that everything for the first few years is to be put back into the business.
What you’re describing is basically cumulative preferred dividends. If you have a C corp you can set up multiple classes of stock, so like you could keep 100% of the common stock with 100% of the voting rights but sell preferred stock. Boston Beer has basically the same setup.
But keep in mind if you’re selling any securities (stock in your own company) you still have to comply with all applicable securities laws. So be conservative in your business plan and your sales pitch or you’ll open yourself up to significant liability.