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Chapter 2 – Money, Money, Money – Family and Friends help out

How to finance your Lemonade Stand Company?

So you decided to start the Lemonade-Stand Company, and to do that you need $100.  Your parents could give you $100 and your worries would be over. However, they would like it more if you can show them some creative ways to raise $100 for the Lemonade-Stand Company.  So you put your thinking hat on. 

Let us say you have savings of $40 and willing to invest it in the Lemonade-Stand Company.  Now you need an additional $60 and some creative ways to raise the needed money.  You ask your parents for a $60 loan; however, they are willing to lend you only $35 with certain conditions.  Conditions are that you must pay 35 cents on the last day of every month, and return $35 at the end of the 3 months.  A quick calculation shows you that your parents are charging you 12% annual interest on $35 loan.  No bank is willing to give you a loan and there are no options as yet, so lock-in your parents’ offer. You write up an agreement with your parents that state conditions for the loan. Smart Move!

Both, you and your parents sign the agreement, or in other words a loan contract.  By doing so, you have just issued a Bond for the Lemonade-Stand Company to your parents. Now you are the Bond issuer, and your parents are the Bondholder of the Lemonade-Stand Company.  In other words, the Lemonade-Stand Company has Debt (or Loan) of $35.

You still need $25 ($100 – $40 your savings – $35 from the Bond issued to your parents) for the Lemonade-Stand Company.  You start calling your friends who have in the past shown interest in a lemonade stand-type business.  You are able to convince them that they should put some of their savings in the Lemonade-Stand Company, as it is expected to make lots of profit!  Five of your friends get excited about the idea but want to know how much money is required and what is in it for them?  You tell them that by putting their $5 each, they become part owners of the Lemonade-Stand Company, which in turn allows them part of profits. For example, $5×5 = $25 will be from friends + $40 of your own money = total equity of $65.  Their share in the Lemonade-Stand Company will be $25/$65 = 38.46%.  You write up an agreement with your five friends stating that you agree to share a part of the Lemonade-Stand-Company with them.

You and your friends sign papers, or in other words a contract.   By doing so, you just issued Stocks or Shares for the Lemonade-Stand Company to your friends. Your friends become the Lemonade-Stand Company Shareholders.  In other words, the Lemonade-Stand-Company has Equity (or Stocks) of worth $65 ($25 from five friends and $40 from your savings). 

This is a great success story!   You have creatively raised the needed capital!  You have successfully completed the financing part of the business.  Now comes the exciting part to deliver on commitments that you have made.  Your parents and friends nominate you to be the CEO of the Lemonade-Stand Company. How will it all work out for you and the Lemonade-Stand Company?  Let us discuss it in the next chapter.

                                           Lemonade-Stand-Company