Author Topic: Investing in friend's upcoming brewery  (Read 27304 times)

ac

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Investing in friend's upcoming brewery
« on: May 12, 2015, 01:25:03 PM »
Hi All

I'm thinking of investing in a friend's upcoming brewery. 

Potential amount = $5,000.  It's less than 1% of my net worth, and I think it'd be fund and potentially lucrative in the long run.  It would be my first time with private equity (not publicly traded). 

The only way of getting a return on the investment is via annual profit sharing.  I'd own 0.5% of the business, so I'd get 0.5% of the true profits (after expenses, servicing loans, etc).

But I still think it could be lucrative in the long run.

I'm a little concerned about tax complications.  I've been focusing on simplifying and reducing taxes (15% top bracket).  This would yield a K-1 I think and of course dividend income hopefully.

Anyone have some useful advice?

skyrefuge

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Re: Investing in friend's upcoming brewery
« Reply #1 on: May 12, 2015, 01:37:20 PM »
Where is it? It's hard to imagine in the US (particularly in a city like Chicago) that we aren't near a brewery bubble, and that a major shakeout won't happen at the next downturn.

Investing in a brewery in 2005 sounds like a much better idea than investing in one in 2015, near a "market top", where every goddamn person in the US has a friend who thinks it's a great idea to open a brewery.

ronrico77

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Re: Investing in friend's upcoming brewery
« Reply #2 on: May 12, 2015, 01:37:36 PM »
It sounds like the brewery will be set up as an S-Corp, if so you will be responsible for .5% of profits but you will also get to write off .5% of losses during the growth period for the brewery.  While not really that complex, yes it will complicate your taxes at tax time.

I won't get into the high risk proposition of any private investment, including the fact as a limited partner you have no control over "profits". There are plenty of ways through salaries and expenses (travel, entertainment, etc)  a profitable company can show 0 profit.

However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

seattlecyclone

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Re: Investing in friend's upcoming brewery
« Reply #3 on: May 12, 2015, 02:25:41 PM »
Yeah, $5,000 for 0.5% equity seems like it could be a bad deal unless they're raising a lot of money and plan to get pretty big pretty fast. But if you think it would be fun to own part of a brewery and you're comfortable with losing all of this money, there are worse ways to invest 1% of your net worth.

ronrico77

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Re: Investing in friend's upcoming brewery
« Reply #4 on: May 12, 2015, 02:44:01 PM »
Yeah, $5,000 for 0.5% equity seems like it could be a bad deal unless they're raising a lot of money and plan to get pretty big pretty fast. But if you think it would be fun to own part of a brewery and you're comfortable with losing all of this money, there are worse ways to invest 1% of your net worth.

Agreed - if you think of it less of an investment, and more like purchasing a membership at the country club where you get to hang out at the tasting room and drink free beer for a couple of years it could still make sense.


Gone Fishing

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Re: Investing in friend's upcoming brewery
« Reply #5 on: May 12, 2015, 02:55:28 PM »
Yep, breweries are on the "very high risk" list at the moment.  I talked to a fellow the other day that is 5 years in and has yet to see a profit.  The market is very crowded and shelf/tap space is limited.  Only those with truly good distributor connections will be able to grow. I'm sure everyone wanting to open a brewery is sure to think they have a good connection until the rubber meets the road.  The best operators seem to be those who are first in a market and use a brewpub model which means making both good food and good beer, but then you are basically running a restaurant, which is a known hazard, in addition to a brewery.  While I am sure plenty will survive, the brewery model is ultimately destined for failure because people go into it thinking it will be a fun 2nd career.  Especially retired execs with tons of cash to throw at losses (they do this to farming as well).  I brought this up 4-5 years ago and no one believed me, but now people already in the business are worried.  What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.     

The only thing that may make a difference is if your ownership entitles you to perform regular QC.  If so, you might be able to get your $5k out (at the expense of your waistline), but if it doesn't I would move on...     

adamwoods137

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Re: Investing in friend's upcoming brewery
« Reply #6 on: May 12, 2015, 03:25:09 PM »
Key points are:

  • How much are the other owners investing, what percentage of the equity are they getting?
  • What will the rest of the capital structure look like?
  • Is the business plan solid? Do you have a physical copy of it?
  • Why does he need $5,000 from you?  There are easier ways to raise money than $5,000 at a time and more traditional routes.  Accounting costs will be more than 1% of this annually.

If it were me I'd ask for preferred stock with a substantial (10%?) dividend attached to it, convertible to some percentage of the equity at your option.  They don't have to pay out your dividend, they just have to before the common gets paid.  If these terms sound too good you probably don't have a clear view of the risk involved.  It is substantial.  Those are the financial considerations.

As other poster's have noticed, donating $5,000 into your friend's brewery is a fun thing to do.  I'd be more inclined to just write him the check in exchange for free beer. Saves on accounting for one.  You've got a better shot at seeing that beer for two.

Interest Compound

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Re: Investing in friend's upcoming brewery
« Reply #7 on: May 12, 2015, 03:44:42 PM »
Hi All

I'm thinking of investing in a friend's upcoming brewery. 

Potential amount = $5,000.  It's less than 1% of my net worth, and I think it'd be fund and potentially lucrative in the long run.  It would be my first time with private equity (not publicly traded). 

The only way of getting a return on the investment is via annual profit sharing.  I'd own 0.5% of the business, so I'd get 0.5% of the true profits (after expenses, servicing loans, etc).

But I still think it could be lucrative in the long run.

I'm a little concerned about tax complications.  I've been focusing on simplifying and reducing taxes (15% top bracket).  This would yield a K-1 I think and of course dividend income hopefully.

Anyone have some useful advice?

Really??

Your friend is valuing their non-existent business at $1,000,000?  I believe this is the only appropriate response:


forummm

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Re: Investing in friend's upcoming brewery
« Reply #8 on: May 12, 2015, 05:10:30 PM »
$1M for a non-existent brewery? It's not like it's an app that sends "Yo!" to people. THAT would be worth way more.

http://www.forbes.com/sites/jaymcgregor/2014/06/19/app-raises-1m-in-funding-for-simply-sending-the-message-yo-back-and-forth/

ac

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Re: Investing in friend's upcoming brewery
« Reply #9 on: May 13, 2015, 10:04:17 AM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I dont know about the valuation either.  To me that means when they get to some stability point, price/book ratio ~2.  So they'd have annual revenue of ~$500,000.  Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible. 

But trying to forecast the bubble - come on now!  This site is a bastion of non-forecasting attempts.

i have the business plan and operating agreement.  shares cost the same amount for everyone.  profit sharing goes by how many shares you own.  they're taking out a $180,000 loan. 

My thoughts are:

the area is not craft beer saturated.  beer festivals here get absolutely packed and sell out

they'll sell an addictive substance

i like their substance

it'd be fun

if i lost all the money i'd be annoyed but not crushed.  $5,000 is one month's worth of savings for me

i'd learn more about business

all startups are "nonexistent".  so yes it's risky to invest in a startup.  but at least for this kind of startup the product is clear.  if your opinion is to avoid investing in any startup because its much more risky than vti, then I respect that.  I do feel like I'd be violating the investing principles that I've finally gotten comfortable with and executed decently over the past year.  but I also get to share the benefits of those principles with very few people.  and this brewery investment would be more tangible. 

Anyone have a good, clear way to value a startup?  Hopefully my price/book and p/e ratio thoughts above are sane. 

frugalnacho

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Re: Investing in friend's upcoming brewery
« Reply #10 on: May 13, 2015, 10:21:10 AM »
As others have pointed out: $5,000 being 0.5% means it's worth $1M.  Something aint adding up.  That's enormous.  How does it take $1M to start a brewery?  I brew in my basement for practically free.

I'm a red panda

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Re: Investing in friend's upcoming brewery
« Reply #11 on: May 13, 2015, 10:30:04 AM »
$5,000 for 0.5% sounds like a TERRIBLE idea.
If you are doing this as an investment, this seems like an awful one.  Even at a much higher percentage, it is a risky investment, though perhaps not a complete rip-off.  (Also- how will you feel when it seems like the business is bringing in money but the "profit" is zero because a major expense is your friend's salary? I worked for a private company that did profit sharing. The amount of "profit" we had to make before they called it such was INSANE because the family that owned the company would first give themselves raises and huge bonuses.)


But if you just want to give your friend $5k to play with and maybe down the road you'll get something from it, but most likely you'll just lose it- well, that's up to you. How much do you like your friend? 

Cpa Cat

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Re: Investing in friend's upcoming brewery
« Reply #12 on: May 13, 2015, 10:30:22 AM »
I want to point out that the valuation of this brewery is 0. It doesn't exist. It has annual revenue of 0.

It's not normal to invest $5000 and get 0.5% based on it's future hypothetical valuation, if it's successful. If you were investing $5000 of a 1M established business, then you'd deserve only 0.5%, because you skipped the build-up phase. Late comers don't get rewards for coming late to the risk party.

But you aren't skipping the riskiest phase. You have all the risk (proportional to your investment). You should get all the reward (proportional to your investment).

dandarc

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Re: Investing in friend's upcoming brewery
« Reply #13 on: May 13, 2015, 10:35:36 AM »
I dont know about the valuation either.  To me that means when they get to some stability point, price/book ratio ~2.  So they'd have annual revenue of ~$500,000.  Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible. 
A P/E of 15 is a good price for a large multi-national corporation (OK that would be a great price in today's market).  You're talking about a brewery that doesn't yet produce beer.  This isn't even remotely comparable to a small-cap stock.

If you were feeling generous, and this were an established small business, you might pay something like 5X earnings + book.  That would be a very generous offer.

Businesses of this size fail very often before ever even making a profit of any kind.  The upside here would have to be quite large to justify a $1M valuation - think if things go well, annual profits of 200K or more.  I get that this is small potatoes in your overall picture, but unless you think this thing has the potential to be a big-time money making machine, you're basically just giving your friend money, even if things work out.

Cromacster

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Re: Investing in friend's upcoming brewery
« Reply #14 on: May 13, 2015, 10:45:52 AM »
You haven't mentioned it, but I would also be worried about your friends experience in brewing.  If he is currently a good home brewer with a business plan and a gleam in his eye....I would be worried.  There is a biiiiig difference going from 5-20 gallon batches in your basement to a 2+bbl system.  Where you are constantly producing beer and have many many more variables that need to be taken into consideration to produce a repeatable product.  Not to mention he will probably have to quit whatever job he currently has and start working 100+ hours a week to have any shot.

Does your area allow for taprooms and growler sales?

Is he hiring an experienced brewer or does he have experience through a school or previous jobs?

All in all it appears you want to invest in this just to be a part of it.  That's cool.  Just be aware you may never see your money again.
« Last Edit: May 13, 2015, 10:47:46 AM by Cromacster »

seattlecyclone

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Re: Investing in friend's upcoming brewery
« Reply #15 on: May 13, 2015, 10:57:05 AM »
Anyone have a good, clear way to value a startup?

I dont know about the valuation either.  To me that means when they get to some stability point, price/book ratio ~2.  So they'd have annual revenue of ~$500,000.  Or, P/E ~15 so annual profits would be ~$70,000. I think that sounds plausible. 

You need to consider the probability of the business actually growing that large. If getting to $500k annual revenue is a sure thing, then maybe valuing it this way makes sense. If you think it has a 50/50 shot of getting to this point, then maybe you should be paying half as much for your share of the company, and if you think it has a 10% chance then you should be paying perhaps 10% as much. It's essential to price risk into the equation if you actually care about this as an investment and not just as a way to buy bulk quantities of beer from a friend.

ac

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Re: Investing in friend's upcoming brewery
« Reply #16 on: May 13, 2015, 10:58:31 AM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it. 

dandarc

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Re: Investing in friend's upcoming brewery
« Reply #17 on: May 13, 2015, 11:03:21 AM »
All in all it appears you want to invest in this just to be a part of it.  That's cool.  Just be aware you may never see your money again.
+1 to this.  Several years ago, a "craft brew bar" in town here sold shares for small fractions of the business to their regulars / home-brew enthusiasts.  The idea was these people would brew small batches for the business.  They paid a small amount for this, and in return are entitled to some pitifully small portion of the profits, and a discount on beer.

So most who took them up, did it for the discount on the beer and to be a part of what was at the time a very unique place here.  They've stopped any pretense of brewing beer at this place by now, but I think these folks do still get a discount on the beers, but as far as return-on-investment, not a great deal, and this was an established business.

So this bar is an interesting place.  All of the beer is good beer, even to the beer-snob types.  No Miller-Lite here.  This was unique - you could get some decent beers at restaurants around town, but with pretty limited selection.  When it first opened, you'd think the place was a perfect business.  Busy all the time, and they had something nobody else was offering.  Today, within walking distance of this place, there are 2 full-on breweries (one of which just got its license to brew just yesterday - the other makes pretty damn good beer), and a more-corporate version of the same business model as this bar.  Corporate-bar even has a separate location that's not walkable from beer-central but definitely more convenient for a large swath of town.  I think the original bar may have staying power - they've drifted even more towards unique beers, and they do have a loyal following being first to market and all, and they go out of their way to have events and such.  But it definitely won't be the money-making machine you might have thought walking in the door 4-5 years ago.

Cpa Cat

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Re: Investing in friend's upcoming brewery
« Reply #18 on: May 13, 2015, 11:12:53 AM »
The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

Except that this makes no sense. They haven't sweated! When they do sweat, they're being paid $35,000 salary for that sweat! You don't build sweat equity AND get a salary.

You may as well say $500k of real dollars and $500k for being awesome! If you think your friends are worth $500k due to their pure awesomeness, then go for it and make this "investment." But you're not exactly getting a good deal here. But at $5000 for 0.5% vs 1% of equity - maybe you don't care and just want to help them out.


Cpa Cat

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Re: Investing in friend's upcoming brewery
« Reply #19 on: May 13, 2015, 11:20:09 AM »
Also, in case it bears saying: Absolutely, do not guarantee that $180,000 loan. Don't sign anything indicating you are responsible for any part of it.

What happens in these situations, is people will sometimes assume that they'd be responsible for only 0.05% of the debt. Or that the larger shareholders would be responsible first. A couple of bankruptcies later and your $5000 investment lands you a $180,000 debt. Make sure that debt is their debt, secured by their assets and has nothing to do with you.

Le Poisson

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Re: Investing in friend's upcoming brewery
« Reply #20 on: May 13, 2015, 11:26:32 AM »
Hmmmm. It sounds like fun, but not like a strong investment.

About 5 years ago we were shopping for a new home. A quirky property came up for cheap on MLS. It was a 1.5 ac country lot with  an old milling setup on it. A 3-storey drive-through barn with conveyors that went to grain cleaning etc.

I set to work and figured out how we could set the whole thing up for a microbrew. It looked awesome. And we could build the whole thing into our mortgage so that we could do it without partners.

Then I started following Beau's Brewery blog - a similar sized operation out of Ottawa. http://beausbeer.blogspot.ca/ And while the blog was very upbeat and very fun sounding, I quickly realized that this was metric crapload of work, and not just a full time gig for one guy, but for a whole family - with NO RETURNS for years. Granted Beau's is in the Ontario market where government rules and foreign monopolies make things harder, but still, Metric Crapload. The beer is pretty good, but it still isn't in The Beer Store in Ontario - and its been close to 10 years since they started.

I don't have what it takes to put in that much effort to a brewery in the hopes that it catches in a field as crowded as the local microbrew scene is, and your friend needs to be a very unique sort of person to have the right mix of zymurgy, marketing, distribution, and persona to pull this sort of thing off. Do you have confidence that he can go from partying until 3 AM on the other side of the state to negotiating water-taking with the township to the health department to get inspections to a graphic designer to create a seasonal beer box... and then go put together beer recipes once all the 'business side' is done without a break between? And can he communicate in a way that makes all these different players feel excited and valued?

Unless this guy was proven in ways I have never seen someone proven, I would back away quietly while offering as much support as you can. Heck, I might offer to buy the first keg once the place opened, but without so much as a taste of product or a bottle to hold, its not for me.

BTW - you can set up a complete brewery for well under $50K now that so many are going out of business and selling off equipment at fire sale prices. Also, there is at least one brewery in Ontario whose business model is to own nothing but the recipes - they use excess capacity in their competitors' outfits to produce and bottle. Basically an ingredients only startup cost. Still too expensive for me.

Here's a 2-year old article worth reading on the direction of the industry - http://www.thestar.com/business/2013/08/30/craft_beer_wave_could_lose_its_fizz_olive.html.
« Last Edit: May 13, 2015, 11:35:52 AM by Prospector »

adamwoods137

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Re: Investing in friend's upcoming brewery
« Reply #21 on: May 13, 2015, 11:29:46 AM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

Well the most straightforward way to value it is the same as the most straightforward way to value anything.  Expected value.  Look at the business plan.  What is the estimation for long run annual earnings?  Multiply that number by 5 or 6.  That's what the "successful" valuation is.  An established private company that has rock solid earnings going back a hundred years is probably only worth a multiple of 10.  You have no liquidity, that's a substantial cost.  It may be a cost you don't care about, but that shouldn't effect your valuation.  There are plenty of illiquid investment opportunities at P/E's less than 15, some substantially so.   Got your number?  Multiply that by the probability that this will happen.  If you use a number greater than 15% it better be a very conservative business plan.  Here's a good way to tell if you are dealing with a conservative or dreaming business plan.  What is the allowance for equipment failure?  Is it 10% of the equipment cost?  Is it 50% of the equipment cost?  Has it not even been mentioned?  We'll assume that the business plan is quite conservative and that the probability of it actually happening is 15%.  We'll further assume that this scenario is $70,000 in profits per year and a final valuation of $350,000.  Scenario 2 is the business muddles along ekeing out a small profit after salaries etc are accounted for, we'll say $10,000 (though you need to be calculating this yourself). In this case your investment is worth $50,000. We'll assign this a probability of 35%.  Half of craft breweries fail.  You'll be quite tempted to think that your friend is special.  He's not.  In your valuation this is the one number you aren't allowed to change.  Total loss at least 50% of the time.  You get to write that off though so, you've got that going for you. 

So our valuation is:

$5,000*Your cap gains tax rate(15%)*probability of failure(50%) + muddle probability (35%) * $50,000 * your share (0.5%) + success probability (15%) * $350,000 *your share (0.5%)

$375 + $87.5 + $262.5 = $725

Your expected value is $725, if we assume that this takes 3 years to play out we should discount it, I'm choosing a discount rate of 4% because I'd hate for you to accuse me of being too conservative. The net present expected value is $645.  Spend $5000 on the lottery instead, its better for your financial health.

There is another worse scenario here.  You get sucked in for more than $5,000.  The question here is what does your friend's balance sheet look like?  Is his house paid off? Does his wife work?  What will you do when the business is sucking wind, he stops making mortgage payments, his wife leaves him, and he gets foreclosed on.  The business is still going, he's working 80 hours a week, and he comes around asking for another $5,000 or $10,000.  Do you invest more?  That's not an impossible scenario.  It literally happened to a person I know who went into the business.  His/her brewery didn't even fail (yet?). Do you understand me.  That isn't even the worst case scenario, he/she is still in! 

Your best case scenario might be a quick bankruptcy, the tax writeoff is probably worth more than what you'll actually profit from this.  If you want to do this and you want it to make financial sense you need waaaay better terms.  If this is the way you like to spend your money I have no judgement, I don't think its likely to be as much fun as you're hoping, because its a coinflip your friend loses everything he has

Some of the criticism here seems to be misdirected though.  You are absolutely right when you say that our guesses on the craft brewing industry are worthless.  They're probably less than worthless because they give the impression that you're thinking this through carefully. While many people point out that there is a lot of competition in the industry its got a lot of tailwind as well.  It seems more likely than not that the regulatory environment will improve, and there is a lot of beer market share to take from the big guys yet.  You could principally build a moat around a strong brand that you build, its not a terrible business to be in.  But the terms you're getting are.  I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it. 

ac

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Re: Investing in friend's upcoming brewery
« Reply #22 on: May 13, 2015, 12:48:10 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment. 

frugalnacho

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Re: Investing in friend's upcoming brewery
« Reply #23 on: May 13, 2015, 01:11:23 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr? 

Interest Compound

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Re: Investing in friend's upcoming brewery
« Reply #24 on: May 13, 2015, 01:14:45 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...

Honest question, are you new to investing?  I can't see how anyone experienced with investing could call this a "fantastic investment".

ac

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Re: Investing in friend's upcoming brewery
« Reply #25 on: May 13, 2015, 01:19:28 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...

Honest question, are you new to investing?  I can't see how anyone experienced with investing could call this a "fantastic investment".

Annual returns of 33% would be a fantastic investment.  CAGR since 1870's of the s&p has been 9%.  So 33% is higher than 9%.

It's risky yes.  I get it.  And the annual dividend is uncertain.  But my response to the challenge of justifying the $1M valuation is the projected 33% dividend by year 3, repeated annually.

forummm

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Re: Investing in friend's upcoming brewery
« Reply #26 on: May 13, 2015, 01:21:44 PM »
The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

Except that this makes no sense. They haven't sweated! When they do sweat, they're being paid $35,000 salary for that sweat! You don't build sweat equity AND get a salary.

You may as well say $500k of real dollars and $500k for being awesome!

Classic!

Generally you don't get half the shares in a startup (that doesn't exist) and get paid a decent salary on top of it (with no revenues). Unless you can put one over on some investors. Generally you get the business going on your own with your own resources (in your basement, nights and weekends, with a loan, etc) and then if you need a bunch of cash to kick it to the next level because you're doing too much business to handle it yourself, and are growing too fast, but don't quite have the cash yet to hire the needed workforce, but you expect to have that cash flow just as soon as you can meet the huge demand for your product--then you get investors. For something cheap to make like beer anyway. If you're talking software where you have to put in thousands of hours of time before it's even possible to make a penny, but the product can scale insanely, then the model is a little different (but still garage, people not getting a salary, etc).

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Re: Investing in friend's upcoming brewery
« Reply #27 on: May 13, 2015, 01:25:19 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

So less than the average stock market returns, for a ridiculous amount of risk that you'd lose everything...

Honest question, are you new to investing?  I can't see how anyone experienced with investing could call this a "fantastic investment".

Annual returns of 33% would be a fantastic investment.  CAGR since 1870's of the s&p has been 9%.  So 33% is higher than 9%.

It's risky yes.  I get it.  And the annual dividend is uncertain.  But my response to the challenge of justifying the $1M valuation is the projected 33% dividend by year 3, repeated annually.

My apologies, I thought you meant 33% total, not in year 3.  Still a ridiculous projection though...

forummm

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Re: Investing in friend's upcoming brewery
« Reply #28 on: May 13, 2015, 01:26:49 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

mizzourah2006

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Re: Investing in friend's upcoming brewery
« Reply #29 on: May 13, 2015, 01:26:57 PM »
500k for a micro-brewery? That might be getting too big too fast? What type of brewing experience does your friend have? You should be able to get everything you need to make and keg large quantities of beer used for less than 100k. The shift from brewing 5-15 gallons at a time in your home to brewing several hundred gallons at a time is huge. Most people that start breweries have home brewing experience as well as commercial brewing experience.


frugledoc

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Re: Investing in friend's upcoming brewery
« Reply #30 on: May 13, 2015, 01:27:13 PM »
It's not really an investment, more of a fun thing to do. 

I would definitely do this if a friend asked me but I also would write the cheque and just ask for free beer.

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Re: Investing in friend's upcoming brewery
« Reply #31 on: May 13, 2015, 01:28:21 PM »
  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

"IF" - How's that for Laconic.

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Re: Investing in friend's upcoming brewery
« Reply #32 on: May 13, 2015, 01:29:09 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

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Re: Investing in friend's upcoming brewery
« Reply #33 on: May 13, 2015, 01:31:29 PM »
What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.     

Not to derail the thread, but does anyone have any ideas for this?

ac

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Re: Investing in friend's upcoming brewery
« Reply #34 on: May 13, 2015, 01:32:29 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

ac

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Re: Investing in friend's upcoming brewery
« Reply #35 on: May 13, 2015, 01:34:38 PM »
What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.     

Not to derail the thread, but does anyone have any ideas for this?

I hear self storage businesses make a bunch of money, but who knows? 

I just go for almost exclusively vti, vxus, and bnd.  How's that for boring?

mizzourah2006

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Re: Investing in friend's upcoming brewery
« Reply #36 on: May 13, 2015, 01:36:44 PM »
Something that would be helpful is a business reason you think the micro-brewery would be successful? Are they already a nanobrewery that is doing well looking to expand?

I'm not sure if anyone else feels the same way, but it sounds like a group of guys that just got together and decided they were going to open a brewery.

Who has experience brewing? Where? Those are things I would want to know before giving money. Also, for me at least owning .5% of a startup doesn't seem worth while. What's the point? Just go hang out at their brewery when it opens.

forummm

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Re: Investing in friend's upcoming brewery
« Reply #37 on: May 13, 2015, 01:37:55 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

So they're expecting to start with nothing and get up to selling ~8,000 bottles of beer per day? That's a lot of customers. I think most successful bars probably sell <5% of that (there are more Tuesdays and Wednesdays than Fridays). Kegs are similarly priced per ounce.

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Re: Investing in friend's upcoming brewery
« Reply #38 on: May 13, 2015, 01:39:14 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

Then they aren't trying to raise $300k, they already did raise it.

I think the tone is just a reflection of the type of deal most here think it is.  It's just not adding up to me, so I am expressing my doubt and skepticism that this is a good deal. 

frugalnacho

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Re: Investing in friend's upcoming brewery
« Reply #39 on: May 13, 2015, 01:40:54 PM »
What you want to invest in is a boring/aggrevating business that no one knows is profitable as hell.     

Not to derail the thread, but does anyone have any ideas for this?

If I did do you honestly think I would be telling you about it?

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Re: Investing in friend's upcoming brewery
« Reply #40 on: May 13, 2015, 01:45:09 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

The numbers simply don't work out.  It seems they just pulled $1 million out of the air as a big number, and are going around to their friends and family asking for money.  The whole thing just screams ignorance at best, malice at worst.  I'd run far away from this, even if it's only a small % of your net worth, in my opinion it's not worth the chance of ruining the friendship.

ac

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Re: Investing in friend's upcoming brewery
« Reply #41 on: May 13, 2015, 01:46:30 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

Then they aren't trying to raise $300k, they already did raise it.

I think the tone is just a reflection of the type of deal most here think it is.  It's just not adding up to me, so I am expressing my doubt and skepticism that this is a good deal.

they've raised some but not all which is why there's still at least $5,000 worth for sale.

there's more to the story than a bunch of guys trying to brew some beer and make millions, but i'd rather not spill all the details since it's not publicly available info.

ac

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Re: Investing in friend's upcoming brewery
« Reply #42 on: May 13, 2015, 01:47:39 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

The numbers simply don't work out.  It seems they just pulled $1 million out of the air as a big number, and are going around to their friends and family asking for money.  The whole thing just screams ignorance at best, malice at worst.  I'd run far away from this, even if it's only a small % of your net worth, in my opinion it's not worth the chance of ruining the friendship.

what valuation would work out?

forummm

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Re: Investing in friend's upcoming brewery
« Reply #43 on: May 13, 2015, 01:58:45 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

Well the most straightforward way to value it is the same as the most straightforward way to value anything.  Expected value. 

<lots of math>

I would also add in that you have to demand higher returns for higher risk. So expected value is far above what you should be paying at this point because the risk is very high. And you have to compare that to your alternative investments. Super stable companies like Johnson & Johnson yield 10% total return (7% real) over the long run.

skyrefuge

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Re: Investing in friend's upcoming brewery
« Reply #44 on: May 13, 2015, 02:04:29 PM »
If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

I think most are guessing that you didn't come here in order for us to talk you into the deal, so we're trying to fill the role of devil's advocates to encourage you to do your due diligence. Particularly since, as you say, this would be a dramatic departure from your relatively-recently acquired skill as a "boring" investor.

In regards to predicting a bubble, in general the bubbles we talk about here involve stock markets, which have thousands of individual opinions "voting" on the same question in order to determine a valuation. So yes, in those cases, it's very difficult to say one's own opinion is wiser than that of the market. In this case, it appears that there is no market of opinions voting on what the value of a 0.5% ownership stake is, so it's a lot more valid to have someone come along and say that maybe $5000 is the wrong price.

With perfect timing, the morning after my initial post, The Chicago Tribune posted an article "The state of Chicago craft beer", in which brewing insiders discuss whether or not Chicago is in a "craft beer bubble". One bit of data is that it's grown from 3 breweries to 60 breweries in just 10 years (with more coming). Maybe that's still a sustainable growth rate, but it at least makes it hard to argue that investing in a brewery today will have a better return that if you'd invested in one 5 years ago. Anyway, your scene may be in a more nascent state than Chicago's or your guys may have a completely different value proposition. But either way it's a pretty interesting article for anyone interested in the still-growing craft brewing scene.

I'm a red panda

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Re: Investing in friend's upcoming brewery
« Reply #45 on: May 13, 2015, 02:26:22 PM »
Quote
what valuation would work out?
There are lots of ways to determine valuation. As an investor you should do your research and determine the one you are most comfortable with.


It seems a lot of people just pick $1 million because they think they have a million dollar idea.  But very few start ups are actually worth a million dollars.  What have they presented to you to justify the current valuation. Is it reasonable?
« Last Edit: May 13, 2015, 02:39:23 PM by iowajes »

uwp

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Re: Investing in friend's upcoming brewery
« Reply #46 on: May 13, 2015, 02:36:28 PM »
Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

As a small investor in a successful(IMHO) craft brewery, I will tell you that those numbers are rather optimistic.
6-7 years in, around 7-8k bbl/year, and not at 2 million in revenue (no food).

Also, the J-curve is pretty heavy.  I would say it took ~4-5 years before there was actual net-net profits that were paid out.  Depreciation, investments in new equipment, accounting... it adds up.  But now that we are passed that, we can reap the benefit of high margins on a product that doesn't really cost that much to make (per/pint).

Anyway, I would say they are asking for a lot with a million dollar valuation already.  What are they bringing to the table (other than projections) that justifies it?  I would want extensive background on their experience and a whole lot of trust in the founders (if they have more than 50%, guess who can give themselves a nice raise from the 35k/yr).  Not just on their brewing ability, but also on follow-through and previous careers.  Even then, it's a coin flip that they catch on in a beer market that has a lot of good choices.

« Last Edit: May 13, 2015, 02:38:48 PM by uwp »

forummm

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Re: Investing in friend's upcoming brewery
« Reply #47 on: May 13, 2015, 02:43:25 PM »
if they have more than 50%, guess who can give themselves a nice raise from the 35k/yr

This is a great point. If they could miraculously increase business to a few million bucks per year, wouldn't they have a good argument that they *deserve* six figure salaries? Oops, looks like there aren't any dividends yet.

adamwoods137

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Re: Investing in friend's upcoming brewery
« Reply #48 on: May 13, 2015, 02:58:01 PM »
Thanks all for the comments

Anyone have a good, clear way to value a startup?

I challenge you to post and justify a valuation that makes $5,000 for half a percent.  If you can't, i'd just give him $4,000 and say good luck, you'll come out ahead and maybe you'll get a few free beers out of it.

Year 3 projected revenue = $2.9M
Year 3 projected profit      = $332k

Year 3 dividends at 0.5% ownership = $1.66k.  33% of initial $5,000 investment.  Just numbers on a page now, but if the numbers come to fruition it'd be a fantastic investment.

Alright lets put that into the model.  $332K * Valuation Multiple (5) = 1.66 M.

15% * 1.66 M * 0.5% = $1,245

Well at least with this scenario you aren't hoping for bankruptcy due to tax considerations!  The expected value is still way too low.  Even if we throw out the chance of breakeven entirely (which is totally unrealistic) we end up with

$375 + $4150 = $4525

This is still less than your investment, and its before we discount it to present value! After we do that (at 4%) we get about $4000.  This is a bet with a 20% house edge.  Still not worth it.  We've even made a completely untenable assumption!  It really just comes down to that you need better terms.  Just out of curiosity did the business plan pass the conservatism test?  (Are they insuring their equipment?  What are they reserving against broken equipment?) A lottery ticket is also a fantastic investment if you win.  I don't know whether the numbers from the business plan are reasonable, but I do know that they aren't good enough to justify an investment!  If you were getting 2-4% for $5000 it'd be more interesting.  If you had more downside protection it'd be more interesting. 

adamwoods137

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Re: Investing in friend's upcoming brewery
« Reply #49 on: May 13, 2015, 03:12:02 PM »


However you might want to look into those  percentages being offered, do you feel that the brewery is worth 1 million dollars today, or is there 995000 other real dollars being invested into the company outside of your 5k? 1 million for a company with no product, no revenues, and no real intellectual property does not seem based on true value.

The founders have 50% of the shares and draw $35,000/yr salary.  They are buying $20,000 worth of shares, taking a $180,000 loan, and trying to raise $300,000 of investment.  So there are $500,000 of real dollars being invested.  And $500,000 worth of founders "sweat equity" I think you'd call it.

How is there $500k of sweat equity? It sounds like nothing has been done at this point.  They don't have the $300k in investments (which sounds pretty vague), or the $180k loan.  So i'm guessing they have no capital at this point. So what have they sweated into so far?  Also how is it sweat equity if they are being compensated $35,000/yr?

I think the $300k in investments is coming from the OP and other friends.

Allegedly.  If they already secured a portion of the investment I would have expected that to have been worded differently.

yes, $300k raised from family and friends

If I'm reading the tone of many of these posts, you guys are more animated about this than I am :)

What's the deal?  Is this based on horrible experiences?

Watched a horrible experiences here :-)  Can't speak for anyone else.  I'm also naturally animated about valuation discussions.  No hard feelings.  Its your money.  For what its worth, I think its probably a fair assumption that your friend is acting honestly, but I do think that he's probably thinking,  "this would be a fun thing to do, and maybe we'll all get rich!  Wouldn't that be great."

I don't see any evidence that your friend is acting in bad faith, or that the craft brewing market is due for a crash, I just think its not a good deal.