Ask HN: Gave loan to startup which is now profitable. What should be repayment?

https://news.ycombinator.com/item?id=5769145

by kennethologist • 13 years ago

5 22 13 years ago

news.ycombinator.com

Hello HN, I am a small time angel investor and roughly 7 months ago I gave a long of $50K USD to a startup with no terms other than when the company is profitable the company will pay me back.

Now this is the second month that the company is now thriving and have Net Revenues of $1 Million USD.

It's time for repayment. What should I ask for? 2x, 5x, 10x loan amount?

I don't want to be outrageous or undervalue my investment. Just want to be fair and need some help in this area.

Thanks in advance

cobrabyte• 13 years ago

Terms at the time of investment would have been ideal but, if I were in this situation, I'd probably consider the number of unsuccessful investments I had made and work to recoup some of those funds. Obviously, you won't want to take so much that it leaves the business in a tight spot. 2x-3x seems fair, since you stated you're an angel investor. I suppose you might convince the company to pay more if you intend to reinvest those funds into one or more angel-type investments.

tomfakes• 13 years ago

I think you may be overvaluing what you have here.

For a loan, under a year, my first thought is a percentage - maybe 5-10%.

If you purchased equity, then you'd be looking at getting a multiple of your money back - but not necessarily on your schedule.

Next time, get the terms up front.

If someone offered me a loan with the terms of 5X on payback, I'd walk away immediately. You need to find out that both sides are not on the same page before the money changes hands. Now that you are in a relationship, this could get quite messy if the expectations aren't similar

benologist3• 13 years ago

5x or 10x seems ridiculous, they have revenue not an exit, you have to ask yourself if they would have accepted that when you made the deal. Loan sharks give better terms than that.

Since you didn't do it under any terms I'd suggest using either one of the 'standard' convertible debt termsheets floating around that YC etc use, or picking the highest reasonable interest rate they might have gotten if they went to a regular lender.

gus_massa• 13 years ago

YCombinator had published (~3 years ago?) some "standard" documents: "Series AA Equity Financing Documents" http://ycombinator.com/seriesaa.html I hope one of them is usefull.

kennethologist5• 13 years ago

Thank you for your input. Just a little more information don't know if it changes anything but the startup came to me with nothing but an idea. No proof of concept only an excel spreadsheet with potential revenues etc. The money I loan them gave them the necessary finances to start the company and I would go out on a limb to say without the money the company wouldn't be in existence today.

Ps. I also purchased equity initially with an investment of 75K for 30% of company. 3 months in the company needed additional funding as development of the application went over schedule and budget.

benologist3• 13 years ago

If the 75k was done under specific terms why not use them for the additional 50k?

That would give you 50% of the company, a valuation could be calculated based on their profit they can use to buy you out?

tptacek2• 13 years ago

None of this changes anything. A loan is a loan, an investment is an investment. If you expected a gigantic payback from your initial infusion of cash, you should have had terms locking that in.

As you probably know, you also can't "call in" your investment, either; it will remain illiquid until they agree to purchase the equity back or have an exit.

sharemywin• 13 years ago

do you ever see the company being sold or ipo? if so, why not see abou converting to equity?

kennethologist5• 13 years ago

No. I don't see it IPOing as don't think it can no more than 20-30 Million Revenue Company. Don't see it being sold as it's very specific to a particular subset of people.

Mitchella• 13 years ago

You should not be 'angel investing'. Here is why: you don't have pre-established terms and contracts that state the exact terms.

If you gave me money with the only requirement being that I 'pay you back', all that means to me is. Give me $XX... I'll give you EXACTLY that amount back later on. No more, no less.

centdev• 13 years ago

If you make an investment into a company of $50k with no terms than do no ask for nor expect a repayment greater than your investment. It is your responsibility to lay out terms as part of an investment rather than make the assumption of your return based on their perceived worth.

frendiversity• 13 years ago

Ask them what they think is fair, and also give them the option to wait longer. They may be willing to give 10x if you are willing to wait until they are at $10m revenue.

orangethirty• 13 years ago

Fair? That will get you sued. Sit down with them, and ask for what you want. Next time, don't lend under those terms. It doesn't make sense, and you are opening yourself to a lawsuit. Hopefully, you have a good enough relationship with them that they won't weasel out. Money changes people.

shail• 13 years ago

Obviously the founders has a reason to borrow money from you (second time) but you too were already 75k down and would have wanted it all to succeed. So my guess is that your 50k further investment was partially in your favor too. So I think if you get back 2-3 times, that should be good enough and you should give them a fixed time frame to pay you back (nothing less than 6 months and nothing more than 1.5 years).

tptacek2• 13 years ago

Something in between $50,250 and $60,000. Loans earn interest. Investments 2-5x because they take a percentage of the upside of the company; loans don't do that.

With no terms whatsoever, the obligation is probably just $50,000.

schoash• 13 years ago

If you didn't discuss terms you cannot ask for more than what you gave.

basdevries• 13 years ago

If you didn't disclose any terms, and feel bad about asking any percentage, just tell them how you feel about it, tell him that from his perspective it's smart to just pay the 50k back, but you think it maybe was kind of an investment because it gave brith to the company it is today. I suppose you have a good relationship with the founders and you could easily discuss this over coffee. A convertible note would be an option too

kennethologist5• 13 years ago

So I've asked for 5x loan. After several phone calls this afternoon we've agreed to 2.5x with payments to start next week for 9 months ($13.8K per month).

Thanks to everyone who took the time to give feedback.

thesmileyone• 13 years ago

You are very lucky. From the terms you laid out in your OP you are only owed $50k, seperate to your equity in the company.

If I lend someone £5 I cannot then expect someone to pay back £25. I expect £5.

If you are going to continue to invest in the future I really recommend you have signed documents with a contract, because not all business owners are as friendly as the guys you lent money to in the OP!

Ask HN: Gave loan to startup which is now profitable. What should be repayment?

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