Sponsors for Restaurants Consume Investment--and Relish Every Bite

As a return on investment, several dozen Southlanders regularly tuck into salmon with watercress sauce and wash it down with a bottle of 1981 Corton-Charlemagnec Or perhaps they devour a potato topped with creme fraiche and beluga caviar and sip a glass of champagne.

Whatever the dish, these investors clearly aren’t interested in microchips or percentage gains. Not in cash, anyway. Food’s the thing for these oddball venture capitalists, and that’s why they decided to plunk down thousands of dollars to help start several of Los Angeles’ most chic restaurants.

Elton John and Rod Stewart, for example, were among 50 of the founding sponsors who put up $3,500 each in exchange for $5,000 worth of food and drink when Le Dome and Rose Tattoo were started in West Hollywood nine years ago, said Eddy Kerkhofs, 38, co-owner of the two restaurants.

Unlike a limited partnership--a far more popular way to raise cash for a restaurant--patrons of haute cuisine share no ownership or day-to-day responsibilities in the operation. They also share no liability other than the loss of their initial investment should the venture fail.

What these food buffs do get are discounts or a number of free meals, all in amounts that exceed their initial investment. For accounting purposes, it’s treated as a club membership. This means that food discounts are treated as a “privilege” and therefore are not taxable, said Ken Frank, 29, who started La Toque in West Hollywood five years ago with 12 sponsors who put up $5,000 each.

But if the sponsor and the restaurant agree to return the “sponsorship” with free meals, any food or drink in excess of the initial investment would be taxed as a capital gain, Frank added.

In return for giving sponsors “privilege” or “trade in kind,” restaurateurs get cash up front without relinquishing any control over their enterprise. “But most important, we have a group of people out there promoting our restaurant,” he said.

“The people I approached are great diners,” Frank said. “They are people who like to support good food just like some people like to support the arts. They get a return in trade; I get working capital up front but keep the freedom to run my restaurant the way I want. They have no equity ownership, but they feel like a piece of the restaurant is theirs.”

It’s a terrific way to raise money for a restaurant, Frank said. “Go to a bank, they’ll laugh at you.”

Manny Klausner, a lawyer, and his wife, Willette, a producer, were original sponsors of La Toque because, he said, “We like to support chefs that are worthy of support. We do it because we are very interested in food. It’s living art that you can consume.”

Lalo Durazo, 28, said he plans to get 25 sponsors to put up $5,000 each to help him start Lalo & Bros., a restaurant that will serve “California French cuisine” when it opens in May in Encino. But he doesn’t need the money. “We have enough cash,” Durazo said. “We want to create the snob appeal.”