Cars and radiation …

half_lifeWhat do cars and radioactive material have in common?

Well, besides each being a potential environmental disaster if not managed well … they both have a half-life:

– For radioactive material, it’s the period of time for a substance undergoing decay to decrease by half,

– For your car, it’s the time it takes for you to lose half your money!

This is because the largest cost of auto ownership is not the finance charges, the taxes, the gas that you put in the tank, or even the tires or repair costs … it’s a largely ‘hidden’ cost called depreciation.

Picture 1

You see ‘depreciation’ when you sell the car as The Amount You Paid less The Amount That You Get Back.

Even the amount that you get back helps to hide the true depreciation cost because you will often trade in the vehicle and the dealer might ‘sweeten’ his offer by giving you a higher trade-in figure than the car is really worth … but, what he is really doing is giving you a discount on the purchase price of the new car (a discount that you may well have received – or exceeded – even if you didn’t offer a trade-in).

Even if the 15% to 20% p.a. depreciation claimed by Debt Free Bible is true, what effect does that have on the value of the vehicle?

Picture 2

The chart shows if you paid $25k for your new car, you can only get $12,800 if you sell it after 3 years, even if you decide to hang on to the car, it has cost you $25,000 – $12,800  = $12,200 …

… or, $4,067 a year!

[ AJC: And, don’t forget all of those other costs that we mentioned: “the finance charges, the taxes, the gas that you put in the tank, or even the tires or repair costs” 😉 ]

So, how accurate is that “15% to 20% p.a. depreciation claimed by Debt Free Bible”?

Well, a paper published by the IAES, which evaluated the depreciation rate of 15 automobile brands available in the USA for the years 2000-2004, yielded 5 tiers of depreciation rates:

Tier One: Honda and Lexus with an average annual depreciation rate of 13.4-14.1%.

Tier Two: Volkswagen and Toyota with an average annual depreciation rate of 16.5-16.8%.

Tier Three: Nissan, Mercedes, BMW, Hyundai, and Mercury with an average depreciation rate of 18.9-21.2%.

Tier Four: Chevrolet, Chrysler, and Saturn with average annual depreciation rates of 25.4-27.5%.

Tier Five: Dodge, Ford, and Buick with an average annual depreciation rate of 31.1-32.6%.

Now, using these rates, I have calculated the Half-Life of each brand for you, simply by using the Rule of 72 [AJC: divide the depreciation rate into 72; the answer is the number of years it will take to halve the purchase price] ….

Use this table to find 7 Million 7 Years Patented Half-Life For Your Next Car:

Honda / Lexus: 5 Years 3 Months.

Volkswagen / Toyota: 4 Years 4 months

Nissan / Mercedes / BMW / Hyundai / Mercury: 3 years 7 Months.

Chevrolet / Chrysler / Saturn: 2 Years 9 Months.

Dodge / Ford / Buick: 2 Years 3 Months.

Using this information, you could do some very fancy tables about the break-even point of spending more to buy a new (say) Lexus instead of a new (say) Nissan – factoring all the other costs of ownership, if you want to get real fancy – given that you have a couple of years worth of depreciation to play with …

… rather, I would like you to see that you are far better off buying a second-hand vehicle of the type that you are after, so that you can pay half-price 😉

You do this, simply by buying a 4 year, 4 month old Volkswagen, or a 3 year, 3 month old Buick, etc.

Get it?

And, even if you were determined to buy new, you are still probably better off buying a slightly ‘better’ brand used – even if it means going up a tier or two – than you are in buying a new ‘standard’ brand auto.

Sorry GM and Ford, but you are in DEEP trouble, because you simply aren’t competitive!

Betting on the lottery …


Ill Liquidity candidly (yet, I am sure, at least a little tongue-in-cheek) shares his plan to make $7 million:

That’s the problem with most retirement plans. I figure I’ll be lucky to still want to be able to do the things I want to do now if I can make it to retirement. That’s why I, and everyone else, would like to have a 7million7year plan of my own. Right now it’s betting on the lottery.

Coincidentally, on the same day that I settled on one of my development sites (it was the $3 mill. one) I was offered a lottery ticket by a vendor … I declined, to which he said “it’s only $7 and you can win $15 mill.”

If anybody can afford $7 it’s me … yet, $15 mill. would offer a huge benefit to me, too … my blog would become $21 mill in 9 years, for example 😉

However, I still politely declined and the look on his face was one of clear non-belief i.e. “who in their right mind would turn down $15 mill. for $7”.

You see, most people’s only plan to make $7 mill. is “betting on the lottery” …

… but, that’s NEVER been my plan.

I wonder if that’s one reason why I’m rich today?

The rule of 70 …

Other than a tenuous link to my previous video on compounding, the only reason that I am showing this video is because of this guy’s uncanny similarity to a famous physicist, Julius Sumner Miller, who graced our television screens with his quirky mix of science and entertainment when I was still growing up [AJC: yes, we did have televisions, even when I was a child 🙂 ] …

… not the only reason, because this video also shows you the power of the rule of 70.

Before you get too excited with the power of compounding, just remember that each doubling (at the 7% compounding rate that he is talking about) takes approx. 10 years:

– in 40 years, you double your money 4 times; so if you start with $100k, you end up with $1.6 million,

– if inflation runs at 4%, this also means your $1.6 million is only ‘worth’  (because this causes your money’s value to halve every 70 / 4 = 17.5 years) a bit less than $400k

… sorry, but when you’re working in 10 year chunks, time really begins to get the best of a single human being’s working life 😉

PS the very first computer program that I ever wrote – on paper tape, with holes punched in it – was to calculate the grain of rice-on-chessboard story that is mentioned here 🙂

PPS I know of this rule as the Rule of 72 … perhaps 70 is easier to remember? In any event, it makes not a great deal of difference over a decade …

Do I need The Money Guy’s help? You tell me …


Should I trust The Money Guy with my $7 million?

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A few days ago, in a discussion about the merits (or otherwise) of financial advisors, I made an admission:

I’m having a hard time finding advisors and mentors who can move me to Making Money 301 (protecting my wealth) …

If you read the article, you’ll begin the see why … in the meantime, Rick kindly offered a suggestion:

Yes! I suspect that there are few people that have $70 million of their own, and fewer still with a long track record of protecting it! You might have to settle for someone with a lot of experience managing other people’s money that has the right mindset to protect your wealth.

I’ve found that Brian Preston’s podcasts has given very solid MM301 advice: If I had $7 million to protect I would ask him or someone like him.

But, WJ proffered the opposing view:

You gotta be kidding.

Asking Adrian who have made $7million himself to send his money to someone who have not made that much money from his supposed expertise?

The only way that advisor is getting rich is from the management fees he’s getting from those clients of his.

My philosophy is simple. If I want to get rich thru properties, I will want to look for someone who have done it thru properties. So, in order for me to trust the advice of the financial advisor, he must show me that he has already achieve financial independence thru investing(not thru giving advice). That is totally different.

I’m stuck!

Who is right? Should I take The Money Guy’s advice or not …

… to help you decide, here is the link to his web-site:

Please show me the way by voting on the poll above and perhaps leaving a comment below …

The Myth of Control …


There are so many myths holding us back from making significant chunks of money – the sort of money that can carry you from $30k in debt to $7 million in the bank in just 7 years – that I feel that it is my solemn duty to break as many of them as possible …

But, why do these myths exist?

I think for two reasons:

1. They may work for the lower required annual compound growth rates i.e. smaller Numbers / later Dates that most personal finance bloggers and authors have personally experienced,

2. People propagate ideas put forward by one author until they become The Truth.

In other words, some of these ‘common wisdom’ personal finance – and, business – truisms are simply aimed at an audience who doesn’t need to get rich(er) quick(er) … and, following those ‘rules’ will ensure that they get exactly what they aim for: 40 years of hard work, followed by a ‘frugal retirement’ 😉

So it is for the myth of business control:

People start their business with the idea that they either have 100% ownership – or, perhaps a 50/50 founding partner – from Day 1 and fervently believe that they will retain this mythical ‘control’ over their business (hence their life) as long at they hold on to at least 51% of their business …

… and, if they should need some outside investment – in their minds, at least – it’s critical that they give away less than 50% of the equity in their company.

Steve voices this point of view very clearly:

You give up 51 % control and who is to say you will make any money at all?? the new controlling owners could eventually throw you to the street.I’ve seen that happen a few times.

Personally, if there is no other options than to go for outside investors to move forward, your better off not giving up any more than 20 to 30% control ever.

First let me break a little myth in this blog … the ‘myth’ that I think that it’s a good idea to hand over a chunk of your company to an investor … nothing could be further from the truth:

I believe (and, have stated) – that you need to have a VERY good reason to give ANY equity away (for reasons that I explained in Decision Point # 1 in this post).

But, once you have crossed that line – and, have exhausted Friends/Family/Fools who may invest token amounts for token equity (i.e. that 20% – 30% that Steve talks about) – you will find that control goes with the money NO MATTER WHAT THE NOMINAL % MAY BE that you agree to hand over (and, THE INVESTOR will decide that %, not you!) …

… if you don’t like the deal, then you will have to make do without the money.


The tool that your investor will rely on is the Shareholders Agreement, where they will make sure that critical decisions (eg hiring/firing; purchases over – say – $10k; new capital raisings; etc.), at a bare minimum, will require unanimous approval of the board … naturally, the outside shareholders will expect to have a seat on that board.

So, at a minimum, a smart minority shareholder will effectively hold the power of veto over your business … and, the Shareholder’s Agreement allows plenty of scope to even provide them with effective control over the business, regardless of their shareholding (be it 20% or 80%).

BUT, and I stress this, as I said to Steve:

There are no hard and fast rules: feel free to find the ‘fool’ who will invest a significant amount without the ability to put you on the street if you don’t perform 😉

The new way to measure wealth …

brucewayne… well not exactly a new measure, more a new definition.

Let’s think about some stages of wealth:

1. Debt Wealthy

At some stage, after half a lifetime of struggle, you will most likely have a mortgage, a partially paid off car loan, some residual student loans, and probably a few credit card bills hanging around.

If you’ve come to this blog via the other personal finance blogs floating around, then this probably bothers you enough to want to do something about it …

… as for the rest, many will struggle with this debt until the day that they die.

But, not the Debt Wealthy!

These lucky few will have risen up the corporate or business ladder high enough that their income is enough to service this debt and a little more:

– They can finance their house, car, boat, and caravan/vacation home

– What they can’t finance, their job or business provides (car, phone, laptop, corporate dinners)

– They have enough left over for a domestic trip or two every year sitting up the back of the plane,

– And, enough to eat and clothe themselves well, and to educate their children.

Their only problem – one that they choose never to voice, yet the one that has the bread-winner tossing and turning in their sleep every so often – is the ‘what if” …

… what if:

– They lose their job/business?

– They get sick?

– They get divorced?

They have no plan other than hoping for the best … and, for many, this is enough and for the rest …

… well, sh*t happens 😉

2. Rent Wealthy

But, for a lucky few – and, never through saving but always through Their Big Lucky Break – a huge wind-fall gain comes in; it could be:

– Selling their business

– Retiring (or being retrenched) with a huge Golden Parachute

– Winning the lottery or the Inheritance Jackpot

Presuming that they understand how to deal with this situation and don’t go crazy [AJC: reading this blog should help], they can probably:

– Finally stop working

– Begin to live their Life’s Purpose

– Pay off all of their debts (houses, cars, etc.)

… and, they should still be Rent Wealthy … a really nice stage of life, because they should have enough passive income (again, if they don’t go crazy) to rent whatever they want, whenever they want it; for example, they can rent:

– Seats somewhere towards the pointy end of the plane (or, even by charter),

– Hotel rooms anywhere in the world that come with at least a few stars,

– A Really Nice Convertible for a drive in the country once or twice a year,

– Time on the golf course as often as they want

… and, the list can be virtually endless.

I should know, because with $7 million I am Rent Wealthy 🙂

3. Buy Wealthy

Of course, if their Big Windfall is really an Obscenely Big Windfall, then a Really Lucky Minority becomes wealthy enough to buy everything that I can rent, either in whole (or, in multiples if they are Oprah) or in parts (eg fractional ownership):

– They own their own personal jet either outright or by fractional ownership,

– They have one or more vacation homes (owned in full or fractionally) around the world,

– They own at least one Really Nice Convertible or share ownership of a few,

– They have memberships at one (or many) Really Nice Private Golf Clubs.

The interesting thing about all of these stages is that they have one thing in common …

… can you guess what that might be?

You are much more comfortable at the top end of each stage than you may be at the bottom of it!

At the bottom, you are always trying to keeping up with The Jones (you know, the ones who can borrow, rent, or buy much more comfortably than you). Others think you are fine, in reality, you are struggling:

– to pay the mortgage, if you are Debt Wealthy

– to pay the bills for all of those discretionary expenses, if you are Rent Wealthy

– to pay for the maintenance and upkeep of all that stuff you own, if you are Buy Wealthy

So, what’s the lesson, other than a cute observation?

It’s simply this:

When you consider your Life’s Purpose, don’t pop yourself into the bottom of the next stage.

Instead, hold yourself back either permanently or until you have enough passive income to drive you to the ‘sweet spot’ of the next stage.

Aim toward the mid-to-upper part of the stage that you think may be enough for you …

… for example: for me, Rent Wealthy is plenty 😉

How about you?

When winning the lottery ain’t enough …

trailer-trashMotley Fool tells us about Lou Eisenberg who just seems like another Global Financial Crisis statistic: broke and living in a mobile home, supported by $250 per week in Social Security and pension payments …

… except that in 1981 Lou “won what was, at the time, the largest-ever lottery payout”, valued at $5 Million.

Now, with the 25 year inflation rate averaging around 3.25% (at least, according to my calculations), I put that at something approaching $9.5 million 2009 dollars …

… a fortune in anybody’s language!

So, what went wrong?

A number of things: for a start, Lou didn’t actually get $5 million in cash, instead he received a 20 year ‘annuity’ of $130,000 a year after tax.

Even so, that’s $250,000 a year (for 20 years!) in today’s dollars – plenty for anybody to live a very nice lifestyle  … so, what went wrong?!

The article doesn’t actually say, but I’ll take a stab:

Like most lottery winners, Lou thought that he was rich and set for life, and probably started spending like it. Big mistake!

In reality, because the money is fixed and runs out after 20 years, it’s nowhere near like having $5 million in the bank: with $5 million, you would put $250k aside and pay off your debts and have a nice holiday and buy a slightly nicer car with the change.

As for the other $4.75 million, you would buy some nice income-producing real-estate for $4.5 million – keeping $250k as a buffer against ‘problems’ – and, live off whatever 75% of the rent gives you … probably something like $225k indexed for inflation for life (and, your kids and/or charities have an inflation-protected estate worth $4.5 million in 1981 and probably around $11 million today).

Now, THAT’S rich 🙂

But, Lou didn’t get $5 million … he ‘only’ got $130,000 a year for 20 years.

So, even though he didn’t know it at the time (but, he sure knows it now that it’s too late) he wasn’t even comfortable … the lottery only gave him enough – IF he planned things well enough – to stop work and live a $65k a year lifestyle!

How can that be so?

Well, for a start, the $130k a year only lasts for 20 years then stops suddenly … so, what does Lou do then?

Secondly, the $130k a year does not increase with inflation …

…. do you begin to see the problem?

You see, Lou should be looking at:

1. What is the buying power of his FUTURE $130k today?

2. And, how much of that $130k can he replace on or before the 20 years is up with passive income?

He should always aim to live off the inflation-reduced lesser of the two.

This is not terribly different from somebody who is planning to retire in 20 years, in that Lou has to use some of his current ($130k p.a.) income to produce a nest-egg large enough to support him in real-retirement (i.e. when he stops working AND the regular ‘pay checks’ stop coming in) except that Lou:

i) Does know what his final ‘salary’ will be (i.e. $130k after tax), and

ii) Doesn’t have to actually do any real ‘work’ ever again … at least, not if he had read this post in advance 🙂

So, here’s the logic that you need to apply if you win the lottery, or even if you just plan to work for the next 20 years, and haven’t actually thought about saving or investing until now:

Step 1

Estimate your final salary i.e. $130,000 (after tax) a year in 2001

Note: You should deflation-adjust that figure into ‘today’s (i.e. 1981 for Lou) dollars. At 3.25% inflation, $67,000 would have the same buying power in 1981 as $130,000 would in 2001. In other words, if Lou didn’t want to lower his standard of living over the 20 year period of his payouts, he would need to spend something less than $130k a year from 1981 onwards.

In fact, to maintain exactly the same standard of living year-upon-year (from 1981 to 2001) he should spend only $67k a year in year one and build up to $130k by year 20, giving himself a 3.25% ‘pay-rise’ each year to keep pace with inflation.

Step 2

Decide what % of your salary that you would like to spend and what % you would like to put towards your future (i.e. when the 20 years is up and your ‘salary’ abruptly stops, or when Lou’s $130k a year checks stop rolling in). Because you can’t spend all the money in the early years, anyway (see Note above), your ability to save is kind’a built in.

I suggest starting with 30% ie that means that Lou should start by spending only 30% x $130k = $39k a year of his payout checks; this is nearly half the full $67k that $130k 2009 dollars is worth in 1981, but (in Lou’s case) is necessary to make the numbers work [AJC: as will become apparent].

Before you say that $39k is paltry, remember that this is all happening in 1981, and his self-provided ‘pay-rises’ will ensure that Lou builds up to a ‘salary’ of $95k in 2009 …

… in fact, the $39k in 1981 IS $95k in 2009: not too shabby 🙂

And, Lou hasn’t lifted a finger in over 25 years!

Step 3

Start saving the balance (i.e. the other 70% in 1981) of the yearly $130k payout check; now, this is a tidy $91k in 1981 dollars (which would be like saving nearly $223k a year, in 2009 … a VERY tidy sum).

Why spend only 30% and save as much as 70% of his payouts? Because Lou has to build his own ‘retirement fund’, he has to do it all on his own, and he has only 20 years to do it in!

Let’s put him 100% into stocks and/or mutual funds [AJC: yuk] and, to be extremely conservative, I simply used the ‘guaranteed’ 20 years stock market return of 8%, to the tune of $91k invested in the first year (1981), slowly decreasing to $56k annual “top ups” by the final year (2001).

Why reducing?

Well, Lou needs those 3.25% pay increases each year to keep up with inflation, but his $130k a year total income is fixed, so something has to give … the good news is that Lou can comfortably afford to increase his spending and decrease his savings rate, IF he plans it well and does it slowly … again at that magic 3.25% annual rate. Get it?

Step 4

With all that money going into reasonably conservative investments, over the 20 years, Lou will manage to keep ‘pay-rising’ his way to a $73k annual ‘salary’ in 2001, yet still manage to build up a $4 million nest-egg!

The Rule of 20 says that even after the lottery checks stop coming, Lou should be able to comfortably live off $200k a year (indexed for inflation for life) by way of passive income generated by his investments (i.e. by a combination of dividends and/or selling a small portion of his stock holdings every year), commencing in 2001

Step 5

Instead of giving himself a sudden ‘pay-rise’ to $200k p.a. when the lottery checks stop kicking in, and the retirement nest-egg dividend checks take over, Lou can simply iterate this model by saving less than 70% of his 1981 income, until his 2001 lottery-spending closely matches his 2002-onwards Rule of 20 nest-egg payout …

… according to my figures, this actually allows him to start by saving exactly half of his first annual $130k lottery check, and spending the other half without guilt:

That’s $65k in 1981 or an annual salary of $160k (in today’s dollars) – indexed for inflation – and, for life!

So, the secret – if there is one – is to:

a) Always think in terms of paying yourself an annual ‘salary’ (whether your windfall comes in one chunk or many), and

b) Always try and live off less than you think that you can reasonably build up in passive income by the time that you need it, and

c) Apply all the other rules that I have shared on this blog, when it comes to deciding how and when (and on what) you will spend that ‘salary’.

Of course, you can always just decide to have fun, splash your money around, and retire to your trailer park, like Lou … easy come, easy go 🙂

Would you trust your money to this man?


Lots of people trusted this man with their money, but more on that later …

First, I want to tell you about The Finance Buff who wants to offer you personal finance advice … he also wants to know how much you’re prepared to pay, claiming that there’s an under-serviced market here for inexpensive, unbiased personal finance advice:

Usually an under-served market exists when there is a big gap between what customers are willing to pay and what it costs to produce what they want. I suspect that’s the case in the financial advice market.

[But,] I’m willing to help others with their personal finance questions. I don’t necessarily have to make much money from it (my full-time job covers my living expenses), but I do want to at least cover my cost of regulatory compliance and liability insurance.

With most things, you pay peanuts and you get monkeys …

… and, that may be the case here:

I am not a financial advisor. I do have personal opinions, sometimes strong, ignorant, or biased. Everything you read here on this blog is the author’s personal opinion, not financial advice. I am by no means an expert on anything. I don’t intend to mislead, but my facts, figures, and calculations can be incomplete, inaccurate or plain wrong.

Of course, that’s just his legal disclaimer … because, after reading the quality of The Finance Buff’s blog, that may not be the case at all … it could indeed be quality financial advice at a bargain price! 🙂

On the other hand, looking for a top-of-the-town advisor and paying the commensurate high price may not get you the kind of quality financial advice that you would expect, either.

Alberto Vilar [pictured above], 68, co-founder of Amerindo Investment Advisers, faces up to 20 years in jail after being found guilty on all 12 counts of fraud and money-laundering against him. Hailed as heroes by their clients, they made fortunes for themselves in management fees. [But,] their fortunes plummeted at the same time as the dot-com bubble burst. They were arrested in May 2005 after a client, heiress Lily Cates, claimed they had stolen $5 million from her.

Price [does not equal] Quality when it comes to personal financial advice.

For that reason, I don’t recommend that you put your money into the hands of any advisor; in fact, I recommend that you do not seek a personal financial advisor at all … rather, you should look for a personal financial mentor.

There is a difference:


1. one who gives advice.
2. Education. a teacher responsible for advising students on academic matters.
3. a fortuneteller.


1. a wise and trusted counselor or teacher.
2. an influential senior sponsor or supporter.

Would you rather trust your financial future to the book-learned “fortuneteller” who will promise to give you a bucket-load of fish …

… or, would you rather trust it to yourself, with the support of the self-made “wise and trusted counselor” who will teach you to fish?

[ AJC: There is another difference: a true mentor won’t ask you to pay for anything more than a lunch or two 😉 ]

Whether you are looking for an advisor, or a mentor, or you don’t care which because you think the difference is moot, after satisfying yourself of their integrity and character, here is what I would look for:

1. If I know my Number and Date, then I would look for a mentor who has made 10 times as much in about half the time, and

2. Doing exactly what it is that I need to do in order to achieve my required annual compound growth rate.

Choosing an advisor and/or mentor by asking these typical ‘financial advisor double-speak’ questions can’t do you any good; you see:

They can’t be aligned with the way you think … instead, they need to be aligned with the way you want to think.

I’m having a hard time finding advisors and mentors who can move me to Making Money 301 (protecting my wealth) … now do you see why?

Is the shark’s bite worse than its bark?


I was really impressed with the quality of our readers’ analysis of last week’s video post (from ABC’s excellent show, the Shark Tank, which is about a group of entrepreneurs who listen to various pitches before deciding whether to invest their own money), so I thought that I should do this follow-up piece, while the video is still reasonably fresh in our minds.

In case you didn’t see the video, or need a refresher, here is the link:

The reader poll shows that people are reasonably split between not giving any equity away at all, or giving away a minority … fewer still wanted to give away a controlling interest.

So, who is right? More importantly, what did the girls decide?

I once told you that most business decisions are made emotionally and justified rationally later, and I believe that this is a classic case of that, but more on that later … for now, let’s simplify this seemingly complex decision (competing offers of $350k then $500k then back to $350k again, against equity of 40% to 65% then back to 51%) into two sets of binary decisions:

Decision Point # 1: To give away equity or not to give away equity, that is the question?!

Rick Francis makes the ‘no equity’ argument quite well:

I wouldn’t have given the equity away- it sounded as if they didn’t really NEED the 350K to keep their business going. They have some big customers and are getting repeat orders. They want the $ for marketing, $350K will NOT make them a household word, and I doubt it would dramatically increase their sales. Their product is in major hotel chains THAT can be their main marketing. They could use the internet to make very targeted ads for a small fraction of $350K which they should be able to do as an operating expense.

And, in a strange twist, Scott actually helps to illustrate the reverse argument:

I wouldn’t give an ounce of equity away on this. You could read the sharks from the first 30 seconds that they were salivating over this. Even if it took me 5-6 more years to reinvest every penny I could into marketing and if I had to do everything I could to tell the world about that idea, including trying to land a spot on Oprah

You see, I think the equity / no equity decision boils down to time … without the Sharks’ help, can you get your business to the point where it will deliver your Number by your Date? If not, then with the Sharks’ help, can you reach your Number/Date?

That extra 5 to 6 years that Scott is talking about could be a killer … not to mention, the longer you wait the more chance there is of stronger competition raining on your parade.

That would be the driving force for the equity / no equity decision for me; while I would prefer to keep 100% of the equity (and control), do I need to compromise in order to win the main game, which is being able to finally live my Life’s Purpose within a reasonable period of time?

At least, that’s how I would look at it …

Decision Point # 2: How much of my soul do I sell?!

Once you’ve decided to sell (part of) your soul to the devil … or, in this case part of your company to the Sharks, it becomes a matter of how much to sell, and here, the trend is clear: our readers want to give away a minority stake. WJ was clear and succinct on this:

I would give away equity only to the point of still being in control.

Whereas, Trainee Investor sees both sides:

Either I would only give away minority equity on terms that left me with control and relatively limited fetters on my ability to run the company OR the investor would have to provide something more than just a monetary investment (such as the ability to significantly expand distribution in a manner which would otherwise have been beyond me).

Here’s how I look at it: the girls – in this case – reached decision point # 1 by deciding that they did wish to give away some equity in return for some benefit (cash and expertise/guidance from the Sharks), otherwise they would not be on the show.

So, now they need to decide what to give away and how much … and, this boils down to simple mathematics.

But, “wait” you say “surely you can’t give away control?”

And, I say: “you already have”

You see, as soon as you sign the shareholder’s agreement, you will find that your control over the company is no longer entirely yours, no matter what equity you still hold: 1% or 99%.

The shareholder’s agreement will be full of “by unanimous decision of the board”, and you can be sure that the Shark sits on that board!

I know, because I have been a 51% joint venture partner and a 40% joint venture partner and it made not an iota of difference … I still had a similar lack of effective control in both cases …

… I have even been a 100% owner and my clients and bankers still held the real control over my company. But, does it really matter all that much? Aren’t we all interested in making the company a success?!

‘Control’ is not all its cracked up to be 😉

So, if you are giving away control – and you will, trust me – just by entering into an agreement with an outside investor, then its time to start looking at what you get. In this case:

– $350k for 40% equity + Barbara’s guidance, OR

– $350k for 40% equity + finance/distribution/administration support for 11% equity + the guidance of 3 mega-millionaires.

To me the decision isn’t even close: once you’ve decided that 40% of your company is worth $350k then tell me where you can buy a complete operational and administrative infrastructure for your business (not to mention close a guaranteed line of funding) for less than 11% / 40% x $350k = $100k?

Folks, it’s the bargain of the century, but you have to be a Shark to see it 😉

BTW: remember that ’emotional v rational’ thing that I mentioned towards the beginning of this post? Instead of the simple math that I would have used to make the correct choice, Luis summed up exactly how they made their emotional choice:

Unbelievable! They made their decision on “I really like Barbara, like I really like her”. Barbara read them right “You got spunk” and at the end “…you are going to be happy”.

Unbelievable, indeed!