回复：I am not good at finance. My thought is,

Thank you for opinion.
I think his loan is like your 2nd option. However, he just told me that all money are put into a LLC entity so that I think his own money is actually serving as equity in this case.(It is not explicitly saying that, so I may need ask him to put it on.)
The contact says that in cases of liquidating, as loan owner, I am entitled to full refund.