ACCOUNTANT EXPLAINS: The 3 SECRETS To Raising Money

Either you borrow the money, you partner with someone that's got money, or you raise the money through an SEC approved manner.

So I know that if that business doesn't go well, I can chase Mark down personally.

And a smart lender isn't even going to stop there because they're going to play like the bank.

That's what I want. If Mark doesn't pay me back, I have some assets I can go against.

Be responsible because if you do a good job on this deal, they're going to be the first ones to loan you on the next deal.

Make sure you're clear on what you're willing to give up.

Document it as if you're enemies, and then operate as if you're best friends.

Welcome everyone to the Main Street Business podcast. This is Matt Sorenson, joined by the incredible Mark J. Kohler. We're excited to be with you today because we're talking about money.

You can't get any better than that. Yeah, let's go get it. I know, let's go get it. We're excited to talk about this because it's actually interesting. We have the more successful clients we meet with, they always imply and are actually quite clear about it. Finding money is easier than finding deals. And it's pretty fascinating because the soon you learn some of these techniques, you're like, man, I can pull this off. Yeah, it's exciting.

And so we want to talk about the rules on how you raise money. How do people actually raise money, whether it's a small business or a real estate deal. What are the three ways? And Mark and I over the 10,000 consults. I remember this is like probably 10 years ago, actually probably around 5,000 consults in he and I, we talked about, we're like, how do we explain this easy to clients. And we're like, you know what? After hours of debating it, we settled in on three methods. And you have to fit into those three boxes. And then it's simple, it's paint by the numbers. It's freaking easy. You can create a masterpiece of raising capital. You just gotta decide your three lanes here and we're outline it for you.

And other than getting charitable donations or some sort of bribery or blackmail, these are the three main. Yeah, Grandma dying is not on the list. I hate to tell you. Sorry. I mean that might work for some of you, but yeah, marrying into money, that's always in the top five.

That works too, you know, but that sometimes you pay the price for that, sometimes the interest rate on that debt is not worth it.

My dad used to say, this is when I was in dating.

Yeah.

Like 35, 40 years ago. He was like, hey, it's always easier to marry a rich girl. Or so you'd say. It's just as easy to marry a girl that's rich than a girl that's poor. And I was like, I don't know if you know my dating pool, dad. You haven't introduced me to a lot of billionaires lately and their daughters. But yeah, yeah. But anyway. No, that's okay.

All right, well, let's dig into it and let's just talk about the three methods. But I'm going to give you a quick preview. We're going to talk about someone being a lender to you and lending money. Someone being a partner to you where they're the cash partner, they're putting in money on the deal and someone just being an investor to you. Those are three distinct and different ways to raise capital. Three different sets of documents, rules you got to know and deal structures.

Yeah. And pros and cons. And I'm just going to say it another way. Either you borrow the money, you partner with someone that's got money, or you raise the money through an SEC approved manner. And so you're going to a security route, you're going to partner, you're going to borrow or lend. And so that's it. And they come with pros and cons. Now let's throw this out too, right out of the gate. It cannot work when you try to blend them. And I know it's. So you think it's easier to raise money when you blend, they'll borrow. And the partner concept and the term that's out there on the streets, that is just. I'm going to just get this out of the gate right away, if I could, is that this participating note, you're trying to raise money and you say, hey, I'll give you X percent on your money and interest rate and then when we sell, I'll give you part of the deal. Okay, you just blended two. Two lanes. You can't drive in two lanes. You're going to get a ticket. Can't do that. You're going to be a problem. Like that metaphor.

I like that. I like that. What about the guys on the motorcycles that are splitting the lanes though?

Yeah, yeah, they're. Well, they're going to.

You didn't account for that.

They're going to die.

You didn't account for that.

Yes. So you don't want to try to do that.

Yeah, yeah. Because what you're doing there, by the way, is you just did a partner model. That's not a note. If they just. You just cut someone in the profits of the deal. Oh, I'm paying them interest too. But now they're cutting on profits. They're a partner now, and now you got to follow the partner rules and think of the partner issues. And there's liability concerns, there's. There's benefits there. We want to talk about the partner model. Mark and I have done it plenty,

but they're going to go, no, no, no, no, no. They're just a lender and I'm going to give them a piece of the action. No, it doesn't work that way. Welcome to a lawsuit where they're going to burn anybody that's getting a piece of the profit that becomes a general partner. Oh, so you can't have your cake and eat it too. So that's rule number one. You have to stay in one of these three lanes. And again, there's pros and cons. I'm not saying one's bad or better or it's just. It just works that way. Okay, so let's go lending. Matt, I got a deal. I am so excited. Yeah, I'm gonna go out and I'm gonna rehab this property or I'm gonna open up this little store and during the holidays and sell sunglasses in the mall. I am so excited. Hey, can I. Would you. Would you like to be my money partner? I need, I need an investor. Can you loan me money? And I have this brain vomit, right? I'm looking for money. Like, how I know. So you're smarter than that. So you're gonna go. Let me give you option one.

Yeah, Lane, option one. And this is the lending model, by the way. Lending is the easiest. This is the most simplified model here. And I actually like it for you. The deal maker that's got the real estate dealer, the business opportunity, because you know your cost. If you're like, hey, I'm willing to pay 10% interest, so, you know, I need 100 grand, and in a year I'm gonna pay you back 110. All right? And so I like the lender model for you raising because it's clear cut, what you get. Once we get to the partner and investor model, you're splitting profits up, you know, and they're in the deals or the business with you forever, potentially. The lender, I pay them back, they get their interest, they're done.

And we'll talk about documenting it. So let's with my example. I love that perfect summary. So, okay, Matt, so I'm looking for money and you say, hey, Mark, I'll loan you 100 grand, but I want 10% interest and I want a couple

points, too, maybe, you know, some origination points.

I hear you, I hear you.

Now let's make it 12%. By the way.

Now, we've seen thousands of this, and Matt and I doing 10,000 consults each. So I'll tell you what the. What's going on in the borrower's head. They're going, ooh. On one hand, they're like, this is great. Matt's going to give me 100 grand. Perfect. But I don't want to give him 10%. I don't want to give them two points. And if I don't make any money, this is bad.

Yeah, I can sue you. Like, if you make. If you're like, well, sorry, I bought $100,000 of sunglasses and I only got 90k for them, all my expenses and everything, and I only made 90k. Yeah, you still owe me 110. I don't care. You owe me 110. Yeah, I will sue you if you don't pay me one.

Well, I'm going to give you a note with my llc.

Yeah, not interested. This, that's a really important point, by the way, what Mark just said there. If, like, let's say, let's think of me, the person lending the money, okay? I'm your lender, okay. And you're like, Mark's got his new llc.

Cool.

Sunglasses, llc, whatever.

Okay.

And he's like, all right, I'll sign a note in the name of my LLC for that. I'll pay you back 110k on your $100,000 loan. And then Mark only sells. He only makes 90k on some. All those sunglasses over the holidays. And he's like, well, I did the best I could. Here's 90K. I'm going to be like, I'm screwed. I can only sue your llc.

It's a shell. There's nothing there.

And Mark's like, that's all I got. I'm not. I'm not selling sunglasses out of that. Next year, I'm doing a new llc.

Yeah.

So what do. As the lender, I would do what the bank does. I would make Mark sign a personal guarantee.

At least.

At least. So I know that if that business doesn't go well, I can chase Mark down personally.

And a smart lender isn't even going to stop there because they're Going to play like the bank. And they're going to be like, what other equity do you have? You have any equity in a home? I want to lean against your home. I want lean like this. And then me, the borrower goes, well, crap, if you're going to make it so hard, I might as well go to the bank. And you're going to say, then go to the bank.

Knock yourself out. Yes. It's not much better over there.

So this is the challenge. As you can already see, I would love, as a guy raising money for my shop or a real estate deal, to get money quickly and get it easily. Obviously that's my goal, but I don't want any strings attached and I don't want to have to pay the 10%. So I'm like, okay, now we're going to come back to how you document that, but if we can juxtapose this for a minute, work with me. I'll say, okay, well, Matt, dammit, if you want all those liens and I'm going to have to pay you back no matter what, I'll make you a partner for 10%.

Yeah.

Do you like that deal? I'll make you a partner for 10%.

If I love your business idea, I do.

Okay.

If I think, God, this guy's on to something. Those are some great sunglasses that he's got. He knows how to sell sunglasses. He's got a great location, he's got a great marketing plan. I want to know your business plan. I'm a little more interested in what the hell your plan is than I was as a lender because I felt like I had you on the hook whether you made money or not. Especially if I got all the liens on your assets and all that. Once you're talking partnership, you got to sell me a little more.

And we're talking shark tank. And so Matt's going to go 10% for this crazy, stupid idea. I want 40%.

And then, by the way, let me say this. If I invested, just think about this as a raising money. If I invested 100k for 10%, I'm putting a million dollar valuation on your business before you've even started.

Yeah.

Is it really this little sunglass shop for the holidays worth a million bucks for me to get only 10%. Now if you're like, well, I'll give you 50%, okay, then we're putting a value on this business of 200k.

Yeah.

And that's a little more reasonable, probably.

And some of you may be going, oh, how'd you Come up with that million dollar value. Because think about it, a business has 100% or 100 units of ownership. It's 100%. I own 100% of it. Right now I want 100 grand from Matt. Now I can borrow that 100 grand and I'm going to be on the hook to give him his 110,000 at a certain point in the future, plus points, who knows? Or I can say I'll give you 50% ownership. So if he's going to put in 100 grand, that means 100 units are going to have, have to have a value. And if he gives me 50% of the company and that means 100,000 is worth 50 units. So now I do the math, that must mean it's a $500,000 company. I've got to do the math and just figure out what that par value. Some of you may have heard that term before. So this is where partner, where people getting, trying to raise money get into a quandary. They get into this where they, they start making promises out the butt, promising interest, promising ownership points or I mean ownership percentages and it gets super convoluted. Yeah.

And I would say decide what you want to do. I think like the real estate deals are a little easier. Just go do private money lending, just do a loan. It's easy for me as the investor. I'm just going to get a deed of trust or a mortgage on the property. Maybe I'm in first, maybe I'm in second, but I got easy collateral. You know your cost of funds as the person running that real estate deal, you know, I'm out when you sell it, we're good and I'm kind of in and out. Let's say it's a flip or whatever like that. On the other hand, let's go back to the Sunglasses example. Cool Sunglasses LLC is I'm in this thing. I got more risk. I don't have an exact asset of collateral. Maybe I secured it on some other stuff. But if I'm doing the partner model, I might look at this as a more long term investment. And sure there's more risk, but I might be like maybe 30%. I might go for 100k because you're going to do this. This isn't just going to be the holiday thing and you're one and done. You're going to continue this business on. You might get an online sell thing, you might go to multiple locations and you got to be clear about that by the way, like you raising the money have Got to say, hey, this is only for this one location. I'm going to go do this in other places or I'm going to have an online store, or I'm going to start selling eyeglasses, or I'm going to start selling T shirts. That, those are different business. You got to be very clear about what is the deal that they're investing in, where they get a share of the profits.

Yeah. Okay, so now with that, and I know I ran down a rabbit hole there just to get kind of the issues on the table. Now if I may, let's back up and let's go back to the lending. Okay, so take a breath, everybody. I, I cut a deal with Matt on the lending. What does that actually look like? And let's kind of summarize those pros and cons, if I may. When you borrow money from someone, you are going to give them a note, a promiss. I promise to pay you back X under the following terms. The number of months, the years, the percentages, yada yada. What Matt said was points, meaning if I borrow 100 grand, 2 points means I'll give you 2 grand just to get the deal done. And then I'll give you 10% per annum, which might be around 9% per month. And when is it paid? Is it paid in a balloon at the end? Is it paid monthly, quarterly? Who knows? So that's what's in the note. And then in turn, what Matt's going to want with that note is some security, some guarantees that he's not going to get left holding this piece of paper worth nothing. Yeah, that would be the personal. What would you want? Yeah, you go through those stocks.

Personal guarantee is one thing because I don't just want a note with an llc and I want the note with the llc. That is the actual business. But I want to add on the personal guarantee also I want to look for any collateral. What can I get in the Sunglasses LLC business? I might say I want collateral on the equipment you're buying. You know, I want collateral on the

sunglasses or a stock pledge that the whole company.

Yeah, I might say your ownership in the LLC I want. Now, of course, if the business goes to the shitter, who wants that? Yeah, but you know that sometimes that's part of a deal too. Now if this was a real estate deal, it's a little more clean cut, right? Because you're like, I got this property deal I'm doing, I'm flipping it and I need your 100k. I'm just like, I'M just gonna get the collateral is a little more obvious. It's the actual deal I lent the money on.

Yeah.

So it's a little more obvious. So that's what I want. We want a little more guarantee, personal guarantee, and a little more collateral. Some certainty that if Mark doesn't pay me back, I have some assets I can go against.

Yep. And a couple of nuances would be on that real estate deal. Matt's not just going to say, okay, give me a lien against that property. He's going to want to know what other liens are against that property. What position am I in? He's going to do some due diligence. What's a fair market value?

Title or escrow company to make sure I know what order I'm in.

Title report, all those little goodies, and then it's all going to be executed. Okay, guys, this is the key. At the same time, you get the money or give the money.

Oh.

Over our careers, we cannot count how many times someone calls us up and goes, yeah, I had this deal. I was loaning someone money, and I gave them the money already. And nothing signed yet. And the person borrowing the money isn't willing to sign. They're changing terms. They've disappeared. Who knows what? Now, I know the topic of this show is how to raise money, not how to protect yourself when you do this. But the point is, you're going to be a better borrower and a better business owner to anticipate this, know that this is coming, be responsible, because if you do a good job on this deal, they're going to be the first ones to loan you on the next deal. And the next deal or as you

grow that business or whatever. And you're like, all right, we can sell a million dollars of sunglasses this year. I need a million. Where's the easiest place to go? The guy that already loaned you 100k that you paid back or clean and how you did the deal.

So do it right.

Yeah.

That's just the moral of the story. Now, again, the pros and cons, and I like the way Matt said this. One of the big pros is, you know what? You're out. Totally. You're. You don't have to share profit. I don't have to give. Let's say I kill it. Oh, my gosh. My sunglasses make 200 gr. I'm like, oh, damn it. I gave Matt 50% ownership. I've got a share of 50% of that profit. Now I'm giving him 50 grand back, plus that same hundred grand that he used to start the business with, I'm going to ultimately owe him that back. There's going to be provisions for that. So if I make him a partner, I'm going to be giving him a lot more money when things go well. So the pro is I'm defined, and it's very clear what I have to give him. The con is I'll have to, even if things go bad. But the pro is if things go really well, he doesn't get to share in that. So you've got to figure out maybe that's the best route to take, and it could be great.

Yeah. And I think typically, if you're out raising capital, if you can get debt, you can get a lender that'll give you money at good terms. That's the best. If I'm business owner, real estate investor, I know what my cost of that money is. If I go crush it in the real estate dealer, the business, I get all the upside of that. All right? And so I think if you can get that, go for that. Now, sometimes you might have a cash partner in a deal. And I've done this in businesses where it's like that person's throwing in cash in the deal, but they also add value in the business. They will help me sell more sunglasses. They will actually help me on that real estate deal because they've done it and they went on them before, and they are smart. And so, like, sometimes a cash partner has a little more value than their cash. And this is like, you know, like, you think of, like, the venture capital or private equity. Just think on the more institutional level is. That's Honestly, their pitch typically is, hey, let us invest money from our venture capital fund or our private equity fund in your business, because we're more than just money. We're going to help you grow your business. We're going to help make connections for you. We're going to do all these things.

Can I just say two words? Shark Tank.

Yeah, exactly.

If you are trying to raise money, probably the best education you can get is just buckle down and watch four seasons of Shark Tank over a week's time. Because this is what you're seeing. Mark Cuban will be like, hey, I'm in. They never want to just lend money. They're not there to lend money. They want a piece of the action, and they're always negotiating. Go. Yeah, but I. I have a connection to, you know, 1,000 stores across the country that will hold your sunglasses, you know, sell your sunglasses. I have a Relationship here. I have. And so they're trying to get. And the person on the stage is trying to give the least amount away.

Right.

And get the most amount of benefit.

Right.

And so if you. That's. That's what you're doing.

Yeah.

Watch it. It's just so helpful.

Yeah. Now let's talk about on the partner model. We're kind of deep into that. We already talked about the documents on the lender. That's the note, maybe some security agreements, mortgage deed of trust, look at collateral, personal guarantee, possibly on the partnership side of the equation. We're typically talking llc. You're going to have an llc.

Yes.

That you're an owner in, but you're

not setting up on legalzoom.

Right. And you're having a lawyer draft. And then you're gonna have your partnership terms and provisions. And this is the Shark Tank thing of Mark Cuban's. Like, I'll give you that 500k you want for that business and I'm also going to go pitch it to here and here and here. That's going to be in the operating agreement. Not just that he put in 500k, but he's also going to do X, Y and Z. We want to document that and make that a requirement and understanding in the deal.

I know, I've heard, and I'm sorry, I could be totally wrong. I looked it up once and I can. I bet money, but that I'm accurate on this. So forgive me if my facts are for a little bit, but I've understood. A large percentage of the deals cut on Shark Tank when they leave the room and they get into the paperwork, they don't do the deal. Ultimately, it falls apart in the deed, in the minutia. Because. Well, I thought you were going to do this. Well, I thought I was going to get this. And because what do you think? Of course, Mark Cuban, in that example, he's going to go do his due diligence. This is all fun. It's all on stage and do this. And you hear the stories. A lot of them do come to fruition, but a lot don't because they go to sit down and work out, the details fall apart.

Yeah.

And so. And that's okay. This is a big deal, too. This is another major point. It's okay if the deal doesn't go with this one partner. Don't pick up yourself. Dust, dust. Pick it up. Dust yourself off.

Yeah.

And there's always another deal. There's always another money person.

And I know you're excited, but don't get like the proverbial deal heat where you're like. You're like, dying for it. And you're like. And so you. Then you go do the deal. And it's not a good deal because you get cornered and they're asking too much, either on the partnership side than you would have otherwise been willing to give up. So stick to what you're willing to give up in the partnership model. If you're like, I'm willing to give up 10, 20, 30, don't give up majority control. Obviously, you need to keep control of the business. This is your brainchild. You're gonna work it every day and try and grow this business, whether it's a side hustle, main hustle, whatever it may be. But make sure you're clear on what you're willing to give up. And that one you go down the road with. If they start asking for more and, like, you're like, I'm on a deadline now. You gotta be okay walking away. And this is why you might want to keep a couple of options open. Because of that example that Mark just gave there of even Shark Tank. They cut the deal. It's recorded on tv, obviously, the conversations right there. But then that deal doesn't come to fruition. That can happen. Plan for that. Don't just be talking to one person.

Yep. And here's. Here's some great advice on how to deal with a lawyer. When you're raising money, you want to find a lawyer that's a deal maker type of lawyer and is also affordable. They already come with maybe great recommendations. You've worked with them before. Because lawyers can just milk this thing like a divorce attorney and start charging, stirring the pot and making it a very expensive deal. And so what happens is people that have had that bad experience go and try to do the deal themselves. So now they're playing on paper at the end of the day, trying to negotiate and figure it out and play lawyer. And then it even gets worse. And so I can't emphasize enough trying to find that good lawyer that speaks business, that understands that the deal happening is an important relationship because they want to be there on the back end. And Matt, you said it so many times before. Bad contract can make a good deal bad, but a good contract makes a good deal better.

Yes.

And it's so important to have the paperwork right.

Yeah. And so that's time and time again, like, the best deals you cut, like, where you're like, man, I negotiated a great deal. That is the one. It is critical. The Documents are done, right? Because six months down, three months, years down the road, that person on there might be like, damn, I got a bad deal on this. Let's make sure the documents properly document that in your favor. And so. And then on the other hand, if your documents are a train wreck and you didn't outline clearly what the deal was, even if the deal is good, we've seen this time and time again. People start arguing, there starts being disputes. Now they can't get basic decision making done. Now there might be a lawsuit going on. Now that business or that deal is hampered because of all this distraction over here and all this anguish and grief that you have because you didn't paper the deal properly. You got a big misunderstanding, and now

it's a whole cluster.

When the business or deal is otherwise a good business or deal.

Oh, my gosh, yeah, you undermine yourself again. Trying stepping over a dollar to pick up a nickel. Or is it step over a nickel to pick up a dollar? Whatever. Yeah, bad deal. So I just. We've got other podcasts on documenting good agreements, good doing, proper due diligence and all that stuff. But now, in a partnership deal. All right, let's summarize this. In a partnership raise capital situation, please do not call this person an investor. They are a partner. They will have a voice. Now, we're going to start blending into the third lane, because if you start wanting a partner that's a silent partner and just gives you money and shuts the hell up, they're not really a partner. And if they lose their money, they're going to claim they weren't a partner. And now you've got a securities issue and we're talking jail time. We're not talking just a little civil lawsuit. So when, if you're out raising money from investors, then you better be in that investor lane. If you're raising money from partners, you're in the partner lane. So do you kind of see what's coming? Here's the pro and con. The pro is you might be able to raise money a little faster. You might be able to have people that bring other intangibles to the deal. They bring money to the deal. The con is you've got to give them a bigger percentage or a percentage of the outcome. And you have to give them a voice. They. It doesn't mean you don't have majority control on certain issues, but they're going to have a voice on a variety of issues. Because if they don't, that means they're a silent partner. They're an investor and they can sue your ass. So be careful. Yeah.

The easy way is just work with lawyers that have done this before and like our operating agreement plans for this. So if I have a cash partner coming in on an LLC and a deal and our lawyers at kqs, lawyers, like we're going to, we're going to try to understand the deal that you have. Obviously we can draft the nuances, but one of the things it's going to say in there is, hey, for certain decision making, we want to raise more debt. You want to pay yourself more of a salary, dilute ownership. We're going to sell the business. I want to dilute you and raise more money. There might be a vote on that, you know, and you can negotiate some of those things. But there's some standard things where it's like I have day to day operational decisions. I can decide what sunglasses we're buying, what manufacturers we're doing, what employees we're going to hire, what vendors we're using. Yeah, that's all in my purview you. But when it comes to like a major decision taking on more debt in the business name, which is going to affect that cash partner.

Yeah.

Paying myself more salary to do the job or any of that, if that is part of the deal, you know, diluting the ownership, like we're going to go back and I got to get unanimous agreement on that. And so, and some of that you might want to talk through and plan and you might say, hey, I am going to dilute you when we grow, I'm going to go raise more money because we're going to go sell $2 million of sunglasses. I got to go buy a million dollars worth of inventory. And so you might plan for that and say that in that, in that operation. So there's agreement on it.

And on that note, you want to, I've said this many times, you want to document it as if you're enemies and then operate as if you're best friends because you've got to look for the worst case scenarios. And I know that sounds a little brutal, but you don't want to go into this document drafting session of sunshine and roses. And we're going to, everything's going to work out great and not talk about what if it doesn't go great, who's what. And when you start asking those questions, a lot of partners are like, whoa, you mean what? I don't get my money back of what? You know. Well, no, you, because this. And I'm working my butt off over here and you're this and you're that. And so you have to really talk through those hard situations and you find out the true colors of your partners.

Yeah, and I would just say too, that there could be multiple partners here. This could be two or three people we're talking about in the partner model. We're kind of referring to one partner here, but this could be a combination of a few people. And this is where even if I've got a lot of the voting rights settled and I've gotten, I've said there's some say I've got operational day to day authority, but the cash partners here do have some say on some major decision making. There is a kind of a point where you're like, you've got too many cash partners. It's like, all right, I got 10 people in this thing. Now, this is not really a partnership model. We're talking the investor model here, where we're going to go in a second. So no, you can combine a group of people. I'm always like, if it's five or less people, don't sweat it. Stick in that operating agreement, llc, partnership, I got five different cash partners. They got a say in what's going on. But I'm dated day operational decision. I cut up some ownership for each of them based on how much money they put in. And then if you're like in this 5 to 10, you're in this gray area where you should get some definitely advice on is this a security or not? And if you're like, matt, I got to raise 2 million bucks for this deal or this real estate, it's going to take more than 10 people. We're talking the fund model here and the investor model, which we're going to touch on in a minute.

Now on this partnership, pros and cons. Now you're going to have an llc, you're going to document all this. Oh, and by the way, I was going to say, I thought it was 15 years ago. Matt and I are, you know, in the same office those days, just in the trenches, doing our four or five consults a day and working late. I remember us both sending over and over again the same list of questions to partners on phone calls. Okay, I need you to go to Denny's and stay there for three hours on a napkin deal with these 15 questions so we can draft the agreement. And I'd have my list and you'd have your list. And finally we got together and said we got to have just a good signature here of all the homework we've got to send these partners to go deal with, they're going to, you know, settle down at a Waffle House and just pound it out and get us the information. And so to this day, that's. That was the genesis of our same partnership memo where we, our attorneys in our office, are going to try to keep it as affordable as possible. The simpler. You can keep it and bring back those answers to the questions. We can draft that llc. We can represent the company. You know, everybody doesn't have to have their own lawyer. If everybody can pragmatically sit down and plan out these issues, the pros and cons of all the worst and best case scenarios, bring it to us. Boom, we're writing up an llc. We have everybody sign waivers that we represent the llc. You guys get in a pissing match, we're out. But if you guys are all cooperating, you got the efficiency of one law firm helping the overall operation. And so that's that benefit of trying to just design the right legal counsel to keep it effective and efficient and successful.

Yeah. And I think it makes sense to use a lawyer in that model. Absolutely. I think it makes sense in the lawyer model and obviously in the investor model, because you need an LLC anyway. You need to start getting some tax planning. You're starting to run a business. You got a deal going right now. You need to get all that stuff pieced together here.

So.

And you want to get it set up to begin with. This is, we talked about this. You can't come back and try to paper this. And I know a lot of people like, well, I need the money next week. I'm, you know, let's slow down for a second. Let's try to rush it through if we can, but you got to be realistic about this. So start early, start thinking this through, think through the deal points, get in with the lawyer, whoever it is, our team and other. There's other great lawyers out there that can work with you and start digesting what you need to know, what the conversations are gonna look like. Choose your lane. I mean, is this just gonna be a lender? That's a lower lift, that's an easier set of documents. Is this a partnership model where I've got, I got some angel cash partners, some people throwing in some money. They're gonna be with me for the business in the long haul. And then, of course, we got the investor.

I love it.

Which is the. This is. We went from Denny's to Waffle House. When you're doing the Investor model, you're at Cracker Barrel.

Cracker Barrel, you're going cracker barrel.

Big deal.

That's a big deal. Now they're fewer and far between. You know, you got to plan your stops.

When you're grocery shop, there's a lot more bells and whistles to it.

Candy on the way up.

Grand slam, which we're talking about here.

Yeah, totally. Now here's where this starts to happen. Remember the cons of a partnership. I need to raise a lot of money. I'm going to probably need more than five or ten partners. Number two, I kind of want these partners to leave me alone. I don't want to have a committee meeting every month to tell me, you know, decisions that I can or cannot make. So you want silent partners. You want to raise more money, you need more than five or ten people. That's okay. Just own it and shift gears and go into the investor lane. And the investor lane can look very, very. It has a lot of options. You might be doing crowdfunding, you might be doing reg D, you might be doing 504. You might be looking at accredited investors, non accredited investors. There's a lot of options there. And that's where it is absolutely critical. You're going to be working with a securities attorney and you're going to be spending at least 20 to 30 grand to get this thing done. It's just the way it is. We try to be at the lower end of that. We've seen people spend 50 grand to 100 grand on these securities attorneys and big firms that'll just rape and pillage you. So but I think realistically it's very doable in the 20-30k range. And you're going to sit down with a securities attorney and choose which option in this lane works, which vehicle in this lane works the best.

Yeah, there you go. I like that. And I, I just to for context too, I think the partnership model, you get done for a few thousand bucks. That's including the entity you need and those documents, getting the partnership document tailored. And then the lender model might be a thousand or fifteen hundred bucks, you know, and so the costs do increase as you get more complexity here.

Great point.

And so on the investor model, if you're not raising more than a million bucks, don't even think about this. It's not worth it. But if you're like, I'm raising millions to do this deal, I'm going to buy a multifamily property, I'm going to go out of the gate With a big team of people I'm going to hire. I got a lot of fixed costs and inventory. I got to buy whatever it might be for. Whatever your business ideas. We're. We're rolling down investor model here. The other thing I'll say, too, is you could start out your business on any on. You could start out with a lender, and then later on it moves over and you need to raise more money, and you go to the investor model. Or you can start partnership models, and you go into the investor model. We've seen lots of that over the years with clients, with businesses or real estate investors that they just get their network going. They get the ball off the ground. They start with the kind of smaller ways of money to get the business or the real estate deals flowing. And then they graduate into this, where they're like, I need a big raise to go to the next level.

Yeah. And before I forget, sorry, if we can backtrack here, this is a nice little nuance, is what's called the convertible note.

Yeah.

Which is super fun because let's say I go back to that original option everybody loves.

Everybody loves a convertible.

Oh, yeah. If you got it, you could put your top down. Put the top down. You know, you never. What are you. Whenever I see someone riding around the top up, I'm like, why'd you buy this?

Yeah.

Better be weather. It better be raining. Yeah, it better be raining. All right, so let's say we go back to our original deal. And I say, okay, I want that 100 grand. And Matt says, okay, I'll do it. And I want 10% and two points and all that. And I go, okay, but if things go well, that's great. If they go bad, I'd like to convert it. I'd like to convert you into a partner. And Matt may say, okay, if they go well or bad, I may want to be a partner. And I get the. So depending on negotiation, Matt may be able to pull the ripcord and go, hey, this is going better than I thought. I get to convert it to real ownership. Or if it goes worse, you might be able to convert it to this or that. And then you may say, if we go to raise capital, I can convert it even further. I can not only go from a partner, I could come to a real investor, and we're going to go to the next level. I get preferred shares, or I get something even more special if we go big. So, yeah, just a thought. The note can have those opportunities.

Yeah. The convertibles are fun. You know, they're just fun. So let me hit just a couple things on the investor model. This is where we have the SEC and Securities and Exchange Commission more interested in what you're doing. Let's just say it that way. There's more money at play and there's more people at play too, typically in this model. So this is where you can't screw it up. And by the way, when we say sec, we're talking about the securities and Exchange Commission, not the Southeastern Conference in football.

Yeah. Which you may hate them as much as we do being in the formal. Former PAC 10. Yeah.

What the hell.

Disagree.

Yeah. So whatever. Screwed on the pack 12:10. So. But the SEC, very formidable opponent in college football also. Some of them have guns in the securities and Exchange Commission. All right. And badges. And they can bring criminal charges. We're not just talking about a civil lawsuit.

Yeah.

You mess this stuff up. We're talking about criminal type stuff. So you got to be very careful about how you raise money. You got to be honest about it. You got to be careful with the funds. Don't just use this for personal expenses. That is the number one thing people will literally get handcuffs on in a criminal claim for is they go raise money for a business or a deal and rather than using that for the business or the deal that they have, they go and they draw and drain all the money out to go have this lavish lifestyle because they're like, they're, they can't handle seeing $2 million in a bank account that they have access to like that. And so you've got to be super disciplined on that. If you use the money for the business and it fails, that's okay. You might get sued. You're not going to get a criminal charge. Businesses fail. Real estate deals go bad. That happens. I'm not saying don't, you're not going to jail for that. But be very careful about use of those, of that money.

Yeah. And actually I'll put a little different frame on it, is that going to investor route is actually a lot of protection for you. You, It's a good thing to do. It's, it's. I don't want to scare you that yeah, you, you steal money, you're going to shell. That's pretty, that's pretty much a no brainer. But if you do your best, you give it a good old college try. You're transparent about the, the documents and, and the operations. That's what it's built for. You really aren't going to get sued per se. You're not going to go to jail. That was their. That was the risk that they took with proper disclosures. So when you follow the steps in it, and we have a lot of clients that have done the partner partnership model and hate it because there is a lot more exposure per se, they've got an answer to people, they get a say, they get a vote. They're like, holy crap. If I go the investor model and I treat the money carefully and I give it a good shot and I lose.

Too bad.

You're now, your reputation might not be great when you go to raise the next fund, but at the very least you're done. And so the securities model really is there to protect you and is to protect the investor. And that's all the SEC is trying to do. They'll come to protect as well. They're not just out there to go after people raising money. They want to. Generally, this is all about stimulating the economy and raising capital and building wealth. So they just want it to be fair. They really are a referee on the court. And one might say they're a police officer, a highway patrolman on the freeway, just making sure everybody stays in their lane.

There you go.

Bam, bam. I brought that home.

And that was exactly the point I was going to make. I didn't have the metaphor nailed there. That's the point I was going to make, is if you stay in your lane of lender, partner, investor, you know the documents you need, you know the deal that's going to be cut, what the typical terms are going to be. What's the economic interest? For me, is this just a lender? Am I cutting it on the profits? Do they have a say? Do they not? If you can nail that, you have the protections, you get the documents done properly. Getting the documents done properly is not for your investors, it's not for your cash partner, it's not for your lender, it's for you. Getting those documents done properly is how you don't get your ass sued. Getting those documents properly is how you can feel comfortable and sleep at night, that the SEC's not gonna be chasing you down. It's not for your investors, it's for you.

Oh, I love it. Well, I like what Matt said at the very beginning, have a plan. And I know what happens, we see it over and over again, is we almost get deal heat. And I like the way Matt said that. We just get so excited that we've got this deal that we cut all the corners necessary to raise money for it and we're excited. I know I've seen so many different. I want to say we. I'm talking on behalf of this business owner or real estate investor. They're excited, they get it. And they go out with authenticity and get people excited and say, give me your money. We're going to miss this deal. We're going to lose this deal. And sometimes they do come through on all the paperwork and. And follow through on all the promises, but it's a risk you don't want to take. And the one thing Matt and I have said over and over again over the years, when you start to get too excited into deal, where you see that you're cutting corners and rushing things, slow down. There's always another deal. It's not worth the risk. There will be another deal. Start to prepare for the next deal. And the clouds will part, the sun will come out and you'll be like, holy crap, now I'm doing it right. And you'll feel so much more. More confident.

Yeah. Let me give like my last example. That was a great song. But I just remember this example that I think hit.

Oh, I love it. Finish with an example. Okay.

Okay. 0809, we had a number of real estate clients. Shiz hits the fan, right? Tough year. A lot of people lose money. Well, we had people out raising money. We had a lot of real estate clients raising money. I remember I had a group of clients doing the lender model and they were doing notes and deeds of trust they were securing on the properties. Great. We love that structure. They didn't do it right. They didn't actually record the deeds of trust and mortgages on the property because they were lazy and cheap. They were getting the documents done, they were getting it signed, but they weren't actually recording it. And following through, I had another group of clients that were doing. They were doing a 506B at the time reg D type offering. They were in the investor model. They were raising money. They had the documents done properly and they were doing hundreds of flips. They lost money. Okay. I remember the Arizona State Securities Commission went after both of them.

Okay.

Client that had the. We did. Actually did their. Their pirate placement docs and everything on the. The investor model. We. The. The. They saw the documents like, okay, you did it right later. Like, literally it was like, case closed.

Like, sorry, you lick your wounds.

The market client calling me freaking out because. Right. You get that letter from a securities regulator. It's like, oh great, what is this going to be? And case closed.

Done.

Client over here. Did you they didn't record those, by the way. They didn't tell us this. Didn't record those. Yeah, they had criminal charges. They literally had to go settle with the SEC on not just civil charges and penalties, criminal charges.

Yeah. No, you may say some of you

love hundreds of people, by the way, in that deal.

Yeah, no, I love Matt's example because you may go, whoa, they were on the promissory note lane. How did the SEC get involved? Remember, they're the highway patrolman watching all the lanes. And when you start taking people's money and saying, I'm doing notes and I'm going to make this note happen and you're taking a piece of the action and what you're doing is raising money. See, that's the whole theme of this podcast. Or you're raising money. So you're raising money using a promissory note model. We meet these clients, they think the SEC isn't even on the planet. They're like, I'm not even going to touch the sec. We're just doing notes. You screw up that process, the SEC's like, oh, hello, we're the, you know, long lost uncle you didn't think was around. We were watching because you effed it up. So guess what, you're playing by our rules now. And so the people that put money in those deals went after the promoters, the money raisers, and jail time. Yeah.

And that was hundreds of people involved in that. And that's when it gets the regulator's attention. So if you're out there in that lender model raising a lot of money that way, you might want to reevaluate that. And so, but that's just a good analogy to make sure you're just executing properly on the strategy you use, even if the deal goes bad or we have an upside down economy or, you know, kind of a once in a lifetime recession type thing that we had in 0809 in the real estate market, you can feel good about it if you did it properly.

I've got one last point.

Okay. I hate this.

I hate this. One last point. Yeah, this is so. I know the podcast will never. One more major point. I know some of you out there listening to this, watching this on YouTube and you're going to. Oh, I got it dialed in. I went to this real estate conference this weekend and the guy teaching the class, he gave me all the documents. He's never been sued. It's been great. And by the way, I paid him 10, 20, 30 grand for this program and he gave Me all the documents so I know I'm covered. Thanks guys, but I don't need a lawyer because I paid for this guy to teach me all this, that gave me all the documents. And this guy is good as gold. He makes a ton of money. He's a big influencer. You should follow him, Mark. He knows everything and he is a Lamborghini.

Yes.

And he has a jet and I saw him on social media. This guy is super uber wealthy. So if I do it like him, I'm sure I'm fine. So guys, thank you for the podcast. I'll note this. I'll send it to someone else that really needs it. Was that passive aggressive enough? I don't know. I tried to make it. I really put it on.

It's sad that it is so true.

Go.

We have that conversation of people who get that false sense of security and they'll say, well, so and so does this, so surely I can do that. Or so and so is advertising that there can raise money on Facebook. How come I can't go to a Facebook post all over the place and say, give me your money and I'll give you a 20% return in 60 days. How come I can't do that? That guy raises a bunch of money. I'm telling you, that guy's number is going to be coming up.

Yep.

Just because someone else is doing it and looking all cool and fancy and selling courses doesn't mean it's right.

Irony is your number could come up before his or hers. So now does it mean all these promoters are wrong or these influencers are bad or the deals or their documents are bad? No. Just get it rubber stamped by a lawyer that's looking out for you based on the laws in your state and based on one little nuance. That you change the deal in one little way could blow up the whole method. So you don't know. You don't know what you don't know. And I know you don't want to pay a lawyer. I get it. Again, KQS lawyers, we're there to build a relationship for many years to come. Find that type of lawyer that will bill hourly, respectably with transparency and teach and guide and go through your documents and see if there's any holes in them. Once you get that, it doesn't matter what the influencer or the trainer is doing now you're managing your world and your vehicle.

Yeah. And I would just say any really successful person from the business side to the real estate, think of the really big real estate investors you might know out there, the famous ones. Think of the big business owners and private equity firms. They have lawyers that are doing this crap for them on a daily basis, not you. Yeah. Protecting them for their protection. And it's an investment in themselves and their future, their business, their real estate deals. And so make the investment in it. It's important we hopefully these three lanes we gave you. I like we're staying on the lanes here is helpful to to you so you can be safe out there on the road of business and real estate.

I'm gonna let you take that one to the hunt. That was sweet, dude.

Fumbling.

No, no, you fumbled it.

You nailed it.

Thanks everybody. We'll see you next week for another episode of the Main Street Business podcast. Please share this podcast with others. Give it a five star rating if you can. We're out there just on the main street trying to help build our own businesses as well and wish you the best. God bless America.

See you next time.