Know-How Exchange : Strategy

Investment comes in 1 of 2 forms - loans or equity.

Loans are where you borrow money with a fixed repayment schedule and interest rate. The lender does not normally have an ownership share, so does not get a say in the business. They can be good, in that of the company does spectacularly well, you only pay off the loans and keep the remaining profits. They can be bad, if the company does badly - even if you make no profit, you have to pay off the loans.

Equity means they take an ownership share in your company. That means the person investing gets a say in what you do proportional to their ownership stake (and if you give them over 50%, they can even fire you). Equity is good if the business does badly, as if you go under, equity does not need to be repaid. Even if you don't go under, but aren't making a profit, nothing is paid out to those who hold equity. Equity is bad if you do spectacularly well, as they get a share equal to their percentage of this profit.

Equity is easiest if you are set up as a corporation. If you are not, it is best to do that. Even if you are currently a sole proprietor and didn't want to incorporate, you would need to form a partnership when someone else invests. Partnerships are generally tricky, and should definitely have partnership papers which call out what each partner puts in, is responsible for (functions, etc.), and gets out of the business.

Assuming you are (or become) incorporated, the investor will be buying some quantity of shares at some pre-determined amount. Basically, you determine the value of the company (including the new equity), and then the person puts up the money to buy a certain percentage of the company.

The investor will likely want to see a business plan and/or details on the company's numbers. This is all important for determining the value of the company. The two of you have to come to an agreement as to what the value of the company is, and what percentage they will be buying.

Without a doubt, MC has a good point that this should be stepped into carefully and with more assistance than we can provide here.