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Every investor obviously interested in max ROI but what is a realistic ROI an investor would seek on a capital loan for startup venture?

What is a reasonable duration for that receiving back the principal and said return? On a hypothetical example of $1m USD ?

uneducated answer

I can only speak for myself, and not necessarily from a position of experience, but if I was interested to lend a friend in a startup venture $1m I would be eager to start receiving principal payments back at the earliest time said venture can do them; even if they start off quite small (ramping up in proportion to revenue, but with flexible timing to allow revenue time to become consistent).

The terms could be something like at least one principal payment of $10,000 within 6 months and minimum +$50,000 over the next 6 months thereafter. By end of year 2 principal paid back should equal a healthy +$xxx,xxx aggregate. Doubling or tripling by another $xxx,xxx by end of year 3 such that by the start of year 4 the culminated principal payments will have completely repaid it in full. So that year 4 the extra interest payments would pay out up to $x where x is what I am trying to get your feedback on as a reasonable amount. Some leeway would be afforded such that the loan could extend into another 1 or 2 years if absolutely necessary before triggering a default scenario.

In a nutshell: a $1m loan repaid over a target of 4 years, with flexible repayment timing such that there is no min monthly (only a min yearly repayment total), with a final year of pure interest payments up to the amount agreed in advance whether that is 10% ($100k) or 50% ($500k) or 200% ($2m).

There would also be some kind of agreement that if the business did very well A) the principal and interest payments would accelerate (ie- repaying back in full + interest in 3 years if the business could accommodate) and B) the loan would convert into a recurring dividend perhaps up to another cap or indefinitely if the friend was generous; coming from entrepreneur perspective I might prefer to give said entrepreneur the ultimate determination.

Anyway, a credit card loan might give the lender a return of 15 to 30% (compounded year over year).

So that aside I would be curious to know perhaps some examples of typical returns expected from that of a traditional bank. As well as from a less traditional investor; ie- friend or family type situation; not a gift but something that results in reasonable return and satisfactory end result for both parties.

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    You need to determine how likely the business is to fail to pay back your loan. How upset would you be if the business failed and you lost all or most of your investment. Aug 10 at 10:14
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    95% of startups fail. I would say there is no reasonable rate for the loan you describe. Revenue-based financing is based on a history of revenue, which you don't have yet. You may want to look into convertible notes.
    – new name
    Aug 10 at 12:39
  • @RobertLongson that's a good point. Some ability to throttle the amount of loan that is initially made available; similar to a line of credit - would perhaps help mitigate this. If the funding was primarily to cover wages & salaries during R&D or software development the $1m in the example is not needed entirely up front. If there was a missed repayment the investor could have the option to cancel any amount of remaining loan that was on the table.
    – Derrick
    Aug 10 at 18:06
  • @googlecloudsuportsucks Thanks for the input. Past business experience, existing revenues from related business, and some traction on what the startup is trying to acheive (ie- if a product is ready or near-ready for market) could help make the case; I wouldn't for example be interseted in loaning a friend $1m if he/she was starting from scratch. If however the friend had put a decade into building the foundation and there was a product ready for market that might be worthy consideration.
    – Derrick
    Aug 10 at 18:19
  • Again still trying to find the right amount of reasonable ROI to project from day 1. I suppose the specific projections from the business' expected revenue could help provide insight as to potential profit margins and said ROI estimate could be deduced from that. Might make sense thus to have a specific minimum ROI established (ie- 10%) and a variable 'bonus' that pays out up to a cap if things go exceedingly well. Determining these mins and highs then would be basis for the negotiation.
    – Derrick
    Aug 10 at 18:20

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As you mentioned revenue as an input to the 'fair ROI', perhaps revenue-based financing is what you are looking for: https://en.wikipedia.org/wiki/Revenue-based_financing

Even if the financing is a loan, the business would need to be careful about complying with securities laws. https://www.quora.com/Is-revenue-based-financing-an-equity-subject-to-regulation-by-the-SEC-and-state-blue-sky-laws

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  • Thanks for the link I hadn't read about that before but that is interesting there is a model already which basically describes what I had in mind. The first paragram in the wiki link almost describes what I had here verbatum. And of course securities compliance would need to be accommodated for; if said compliance was not trivial the budget for counsel could also be on the initial negotiation table and factored into total repayment.
    – Derrick
    Aug 10 at 18:24

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