Investing in someone else's startup business

[Slow2FIRE]

A friend of ours is soon to graduate from medical school (with the typical $200K+ of debt).  This friend does have experience running their own business.

Recently they were relaying to us that they will probably work in someone else's practice for a few years until they can get enough capital together to start their own practice.

This had me considering (with my wife) that we could provide a portion of their startup capital for a small ownership stake.  Nothing has been discussed with our friend yet as we are exploring the idea between us (my wife and I).  We'd be willing to invest a max of 2.5% of our networth, but not interested in a loan arrangement.

I'd prefer first hand experience, please.
Anyone else get involved in deals like this with a friend?
Lessons learned?

Just off the top of my head my thinking is as follows:
1.  We'd be helping a friend get started with their own practice sooner.
2.  We'd be able to swallow a max of 2.5% loss of networth without it hurting us financially or emotionally (we get a 2.5% swing over a month of stock market movement these days).  I am saying, if our investment is a total loss we'd be okay.
3.  We know that they were able to handle the management and administrative end of their prior business, but didn't feel they could sustain the same type of physically demanding work forever and thus changed fields.
4.  Depending on how the business arrangement is worked out (buy out provisions, profit sharing, etc) we should be able to have a decent return on equity if they are successful.
5.  No idea what kind of startup capital they would need and how it would work for them to get loans from SBA in combination with a small private investments from us while they are paying down such huge debt.
6.  Not interested in being their lifeline.  Just a one-time investment sink or swim.
7.  I want to make sure that there is no way that we can be held personally liable through the corporate structure for any medical malpractice on their part should it happen.

[Slow2FIRE]

I am realizing that I probably gave too much information and not enough information.

Too much, which raises questions unrelated to my query because it isn't enough information with the details that I did reveal.  I really want to just generalize this to investing in someone else's business that you have a relationship with and not get into the minutiae of timeline for a doctor to start a business after residency, the actual dollar amounts we'd be interested in investing, etc.

[harvestbook]

I invested in a friend's startup. I am in a related business so I understood what he was doing and was on the advisory board. I got a 3 percent share in the S-Corporation. It's morphed a bit in the few years since. I went in with the idea that I would never get any of the money back and if the corporation succeeded, it would be good for my own business because I could use it. Plus if it were ever sold I'd have a piece of the pie. And I thought it was a positive, beneficial pursuit.

I don't even consider it part of my assets or to have any "value." It was probably about 2-3 percent of my assets at the time and I was eager to diversify. I haven't really learned anything except things will probably evolve from the original conception and I suppose the gold standard of never speculating more than you can afford to lose.

[Bicycle_B]

I invested in a friend's business.  It went broke and I lost the money.

[LessIsLess]

A friend of ours is soon to graduate from medical school (with the typical $200K+ of debt).  This friend does have experience running their own business.

Recently they were relaying to us that they will probably work in someone else's practice for a few years until they can get enough capital together to start their own practice.

This had me considering (with my wife) that we could provide a portion of their startup capital for a small ownership stake.  Nothing has been discussed with our friend yet as we are exploring the idea between us (my wife and I).  We'd be willing to invest a max of 2.5% of our networth, but not interested in a loan arrangement.

I'd prefer first hand experience, please.
Anyone else get involved in deals like this with a friend?
Lessons learned?

Just off the top of my head my thinking is as follows:
1.  We'd be helping a friend get started with their own practice sooner.
2.  We'd be able to swallow a max of 2.5% loss of networth without it hurting us financially or emotionally (we get a 2.5% swing over a month of stock market movement these days).  I am saying, if our investment is a total loss we'd be okay.
3.  We know that they were able to handle the management and administrative end of their prior business, but didn't feel they could sustain the same type of physically demanding work forever and thus changed fields.
4.  Depending on how the business arrangement is worked out (buy out provisions, profit sharing, etc) we should be able to have a decent return on equity if they are successful.
5.  No idea what kind of startup capital they would need and how it would work for them to get loans from SBA in combination with a small private investments from us while they are paying down such huge debt.
6.  Not interested in being their lifeline.  Just a one-time investment sink or swim.
7.  I want to make sure that there is no way that we can be held personally liable through the corporate structure for any medical malpractice on their part should it happen.

Make sure you are a "silent" partner.  Leave all strategic and operational decisions to the main owner.  Can you do that?

[Lucky Penny Acres]

Hire a competent lawyer who is familiar with these types of deals and make sure you have all of the proper legal agreements in place and signed. That would also help with your questions on blocking liability.

Don't just write your friend a personal check with his oral promise to give you a couple % of the company. I have seen this sort of thing happen (with relatively small dollar amounts) in my circle in the past and it has always ended poorly for all involved.

[px4shooter]

You are missing a valid point of not jumping right into an individual practice. It has nothing to do with raising money, but it is the establishment of a strong core of patients that will be the base of the new practice.

He can open a practice on day 1. If he lacks any customers, he is paying rent, insurance, and employee costs.

One of the top complaints I have heard from the doctors I know and worked with is that they wanted to be a doctor so they could practice medicine. Their own practice is not about practicing medicine anymore, as the business aspect has taken over. 2 have dumped their own practice and jumped into partnerships. Shared workload of running the business and sharing of customers has allowed them both not to be overly stressed about daily operations, as they can rely upon each other

[Slow2FIRE]

A friend of ours is soon to graduate from medical school (with the typical $200K+ of debt).  This friend does have experience running their own business.

Recently they were relaying to us that they will probably work in someone else's practice for a few years until they can get enough capital together to start their own practice.

This had me considering (with my wife) that we could provide a portion of their startup capital for a small ownership stake.  Nothing has been discussed with our friend yet as we are exploring the idea between us (my wife and I).  We'd be willing to invest a max of 2.5% of our networth, but not interested in a loan arrangement.

I'd prefer first hand experience, please.
Anyone else get involved in deals like this with a friend?
Lessons learned?

Just off the top of my head my thinking is as follows:
1.  We'd be helping a friend get started with their own practice sooner.
2.  We'd be able to swallow a max of 2.5% loss of networth without it hurting us financially or emotionally (we get a 2.5% swing over a month of stock market movement these days).  I am saying, if our investment is a total loss we'd be okay.
3.  We know that they were able to handle the management and administrative end of their prior business, but didn't feel they could sustain the same type of physically demanding work forever and thus changed fields.
4.  Depending on how the business arrangement is worked out (buy out provisions, profit sharing, etc) we should be able to have a decent return on equity if they are successful.
5.  No idea what kind of startup capital they would need and how it would work for them to get loans from SBA in combination with a small private investments from us while they are paying down such huge debt.
6.  Not interested in being their lifeline.  Just a one-time investment sink or swim.
7.  I want to make sure that there is no way that we can be held personally liable through the corporate structure for any medical malpractice on their part should it happen.

Make sure you are a "silent" partner.  Leave all strategic and operational decisions to the main owner.  Can you do that?

Absolutely.

[Slow2FIRE]

Hire a competent lawyer who is familiar with these types of deals and make sure you have all of the proper legal agreements in place and signed. That would also help with your questions on blocking liability.

Don't just write your friend a personal check with his oral promise to give you a couple % of the company. I have seen this sort of thing happen (with relatively small dollar amounts) in my circle in the past and it has always ended poorly for all involved.

Yes, this was a point my wife and I were discussing.  If our friend is interested in some startup capital, we'd get an attorney to write up the business contract.

[Slow2FIRE]

I have no experience with this.... 

That being said, I thought I'd weigh in just to give some food for thought.

There are probably benefits to for a novice in the medical field working for another's practice as they get started. 

1.) Unexperienced people can make a lot of mistakes especially when they do not have someone experienced to consult with easily. Working in a practice would probably operate like an apprenticeship as this new person learns the ropes.
2.)New people may have trouble getting patients or clients on their own, working for a successful practice right away would eliminate that problem.
3.) Doctors don't always have the best reputation when it comes to managing money.  I think this is one of the reasons The white coat investor site was started.  Why not see how they do making a dent at their loans and how they adjust to the new pay scale?   They may have different ideas as to what it means to live frugally, attack debt, and build said capital.
4.) Your friend may also have different ideas from you as to how much profit to return to shareholders of any future practice and how much to reinvest in growing the business.


If you want to help, it might be better to offer to loan the money instead of trying to buy an equity share in a business.  Loans have a fixed payment schedule, and creditors generally have stronger rights than equity-holders if things don't work out and the practice needs to be dissolved, etc.  And if you wouldn't feel completely comfortable loaning the person the money to get started, it might not be a good idea to buy in either.

Duly noted.

I don't want to do a loan, because I don't want them to feel beholden to us in any type of repayment schedule.