Start-Up Loan Pitfalls and Partnership Perils

[KateS]

My question involves business law in the state of Oklahoma. My daughter is about to graduate from college and wants to pursue her dream---opening a business in a metro area she knows well. She has potential partners, a great business plan, a possible location (with a tax break), and a niche product that has already drawn some interest. However, she has no start-up funds, and I'm uneasy at the prospect of her taking out a loan and starting adult life in debt---something we have always avoided as a family. (She has no college debt.) She is considering a business line of credit and says that I can co-sign that without being liable for how it's used---effectively, lending her my good credit rating for this purpose.

My questions are...

1. Is this wise? Are there better options, or is a business line of credit the best way to go? Is it safe for me to "lend" my credit rating*? We know nothing about these things.
2. What about the businesses---from all over the country---who are now contacting her to offer loans. How can she tell the sharks from the legitimate businesses?
3. What kind of legal safeguards does she need to have in place regarding her partners---friends who are enthusiastic, but young and cash-poor? What are the prudent ground rules?

*I should add that my credit rating is very good but that I have only PT employment now---like so many others, I'm looking for FT work.

Thanks for any advice you can offer! My own preference would be that she get a FT job first to save up money, but the window of opportunity for this niche business seems likely to close quickly.

[Mr. Knowitall]

She is considering a business line of credit and says that I can co-sign that without being liable for how it's used....

Well, yes, but you would be liable if the money isn't repaid.

Is this wise? Are there better options, or is a business line of credit the best way to go? Is it safe for me to "lend" my credit rating?

If they can find funding without your putting your credit on the line, that's better for you. I don't know what other funding options they've explored or considered. (Some interesting alternative sources of funding are coming into their own - e.g., kickstarter.)

What about the businesses---from all over the country---who are now contacting her to offer loans. How can she tell the sharks from the legitimate businesses?

Investigate them. I would be deeply skeptical of somebody who wanted a significant chunk of the company in return for money, particularly if they are cold calling.

If she has that type of attention for the product, it's possible that your cosigning would be a pretty safe move - but if you do cosign I suggest having a contract defining when they must refinance, or including similar provisions to protect you over the longer-term.)

What kind of legal safeguards does she need to have in place regarding her partners---friends who are enthusiastic, but young and cash-poor? What are the prudent ground rules?

Presumably they will create a corporation, issue shares, and have their respective rights and duties set forth in the bylaws or any restrictions on the shares. It would be sensible for them to have a buy-sell agreement, defining how shares will be priced and who can buy them in the event that a shareholder leaves the company, and they would probably want a right of first refusal for the other shareholders to buy the shares. They would want a clear understanding of their role and income as employees of the corporation, versus their role and any right to profits as shareholders. Depending on how shares are to be divided, they may need to have a tie-breaking mechanism in the event that there's a potential for shareholders possessing 50% of the voting shares (or 50% of the members if they go with a LLC) want one thing and the others want something else. There are many factors to consider.

My own preference would be that she get a FT job first to save up money, but the window of opportunity for this niche business seems likely to close quickly.

I can understand that. Some new businesses are built in the evenings and weekends by people who hold regular jobs (or are built in the days by people who hold evening and weekend jobs). I don't know how feasible that would be with your daughter's idea, but if people are calling offering her money then it sounds like she needs to get moving.

[seinfelddvds]

Golden came to the startup world with several years of experience in his field.