A business partner I want to bring on is willing to invest more than I am at this stage in the business, but I will be more actively involved in the day to day operations. I want to give him 40% of the company and I retain 60% ownership..
Can somebody advise whether this is in normal practice and reasonable? I've never opened a business of this scale and have never brought on a partner to this capacity.
Cash money should be treated separately than sweat equity. There are practical reasons for this namely that sweat equity should always be granted in conjunction with a vesting agreement (standard in tech is 4 year but in other sectors, 3 is often the standard) but that cash money should not be subjected to vesting. Typically, if you're at the idea stage, the valuation of the actual cash going in (again for software) is anywhere between $300,000 and $1m (pre-money). If you're operating in any other type of industry, valuations would be much lower at the earliest stage.
The best way to calculate sweat equity (in my experience) is to use this calculator as a guide: http://foundrs.com/.
If you message me privately (via Clarity) with some more info on what the business is, I can tell you whether I would be helpful to you in a call.
Dear Entrepreneur,
This is a huge question with a million answers! In my opinion, get lots of opinions. I like the writings by Paul Graham about equity. That may give you some new angles to think about. When you think you have it figured out - I would recommend that you call someone on Clarity to get more information (I'm not the best fit for that).
In my experience with Internet focused startup businesses - yes 60/40 is normal and reasonable. So is 50/50, 99/1 or 1/99 or any other variation. This is all about skin in the game, cashflow and assets. Who is engaged in the operation of the business and how much? Is this partner going to work on the business - or be an investor? Is this better as a loan for everyone? Is there a profit share or some other potential structure here? I have seen too many times where equity is given away freely to an "investor" partner with no real responsibilities.
What do you value with this partner? Is connections? Access to more financing? Operational knowledge? Management experience? These things should be quantified somehow. Also, another way to look at it...imagine you have another investor interested in committing the same amount of money -- what would that investor have to contribute to make you switch partners? This exercise gives some positioning ideas --
Also, what about strategically... If you are in at 60% and they are 40%, what happens if you take on additional investment rounds from this other partner? What happens if you bring on a third party investor...what will your equity level be in the future? What will the dilution be?
Start putting together all the different ways to package it up, pick your best five, talk with a consultant, then decide on something that is fair to everyone. You could have your decision in a couple days this way.
Cheers --
Nick
I have been through something similar in recent months. I agree with the above answers you need to set a valuation now. But you also need to set a valuation 2, 3 and 4 years out. Based on EBIT and a reasonable projection. More importantly you need to forecast how much more capital you will need. Take a hard look at what you need to do. Double it. Assume the next round will dilute both you and your co-founder. What will the picture look like after that?
You asked this 9 months ago and by now you have probably run into problems with your 60/40 split. You probably realized that commitment levels have changed, the team has changed, the amount of money you needed has changed, and any other number of changes have forced you to renegotiate your split which was probably a painful process and you may still feel uncomfortable with the split. I hope I'm wrong, but this is a very typical scenario with fixed equity splits.
This problem could have easily been solved using a dynamic equity split. Each contribution of cash, time, ideas, supplies or anything else would be accounted for and each person would have exactly what they deserve.
The model I designed is called a Grunt Fund. It assigns a fictional value, called "Slices" each input based on the fair market value of that input and a risk multiple. A person share at any given time, therefore, is their number of slices divided by the total slices. It gives you an exact number.
I have written extensively on this topic and have a web site at SlicingPie.com. If you contact me through the site I will send you a copy of the book I wrote on this subject.
I hope all is well!
It's a pretty good opportunity. Firstly don't miss it. If u go for 60:40, there may be a chance of clashes between you and your partner and ultimately both will suffer. it is the time to act smartly. agree on 50:50 along with some commission or incentive or remuneration or salary or allowance or perquisite, by whatever name called, for yourself exclusively. business in today"s era has become a bit complex equation and in your case there comes fact of matter of capital.
for more advice on this issue you may follow up mu advice on call.
Thnaks and Regards.
I cannot give you a "magical answer", but I can tell you what has worked for me (more on my journey here: RMentrepreneur.fyi.to/LinkedIn ). My businesses were successful (successfully exited both) for many reasons, among them making more right decisions than wrong ones, and for thinking strategically. One right decision that we made early on was to split the equity equally among myself and my 2 other co-founders. We realized that because we were going to pay the same price and had the same level of commitment, mainly forfeit college and have no social life, it was fair for each of us to have 33,33% of the company. Whatever money we had to start off with were treated as individual loans that the company would pay back proportionally when ever it was financially possible and mutually agreed upon by all. As for a partner coming at a later stage this requires a lot more than just numbers, requires wisdom to understand the psychological implications. The entrepreneurial journey is like one of those old wooden roller coaster rides but with no record of proper maintenance in years (think risks!), and the wagons are very far apart. Trust me, you and your co-founders are NOT in the same wagon. Someone has to always be going up (motivated) to rally the troops in times of despair. Happy to take your call.
Your time is money. Your blood, sweat and tears are worth more than most give credit for. He needs to be involved to understand how the capital now being administrated, otherwise other share holder will take you for granted, may expect profit that hasn't been realised. He must be involved or he/ or she will have a toxic leveling ignorance and intitlment may run you both in the ground. That said 20 to 45% .of whAt ? How are you landing
on that number ? It seems rather high and not far from take ng control if more capital is needed, you must maintain creative control. They say.ply need to attend mi Utes and understand what is taking place.bor they may expect more than is available. Businesses take time to budget & grow. Setting aside shares, your salary comes office he top as well, don't sell yourself short. I am sure you know this already , just ensure that what you bring to the table is worth more than money. With that there must be a level of participation until they have the insight that you posses, they need to submit and allow you to be the " Boss ' partner or not there must be a decision maker and those decisions must be respected.
There are many reasons why directors of private limited companies decide to split one company into two or more companies. Many will be owner-managed or family businesses that have grown such that different members are responsible for separate departments or types of business. As the business has grown, each may wish to take that department forward, separate from the other parts. Family members may have had disagreements as to how the business is run and wish to go their separate ways, taking with them the part of the business for which they have been responsible. A demerger may also be relevant as a precursor to selling one or more of the businesses, retaining the remainder. One area of the business may be a higher risk business and as such the whole would be better suited to separate legal entities. A demerger is also a way to split and separate the liabilities relevant to businesses owned by the company. Whatever the reasons, the aim will be to undertake the procedure as tax efficiently as possible for both company and shareholders alike, whilst at the same time ensuring that each company remains trading.
The risks one encounters while splitting a company are as follows:
1. Business Environment Uncertainty: Credit markets were tightening for the company’s debt refinancing, creating concerns about the timing of executing the split. Also, the EU data privacy laws required approval from the EU work councils to split the companies, so the team would have to work diligently to comply with evolving regulation.
2. Operating Model Definition: The organizational design for the two companies continued to evolve, with the creation and appointment of new C-level executive stakeholders. The target-state operating model was also in flux, as each of the new leaders evaluated how centralized or decentralized the future-state companies would be.
3. Employee Impacts: Initially, there was uncertainty for most corporate employees in the company. Which company would I work for? How would my role change? Where would I be physically located? With this uncertainty in the air, employee attrition during the project posed a material risk to meeting target deadlines.
4. Technology Target State: Standards and enterprise agreements for the technology infrastructure that included synergies for volume pricing would have to be restructured and renegotiated, potentially introducing increased cost to the new companies. And, as with all functions, there would now have to be two IT departments.
Thus, to avoid the risk and successfully split your company follow the following steps:
1. Establish a separation management office and steering committee: Splitting a company requires cross-functional collaboration and visibility at the strategic planning and execution level. Start by creating a Separation Management Office, consisting of senior functional leaders that will oversee the end-to-end split across HR & Organizational Design, Shared Services & Physical Location Structuring, IT, Financial Reporting, Treasury & Debt Financing, Tax & Legal Entity Restructuring, and Legal & Contracts. The Separation Management Office should report to a Steering Committee consisting of the Board of Directors, CEO, CFO, and other C-level leaders. When faced with difficult questions that require a decision to meet deadlines, the Steering Committee should serve as the ultimate escalation point and decision maker to break ties, even if it means a compromise.
2. Assemble the right project team: A split will require dedicated, skilled resources that understand the cross-functional complexities involved. This project team will need people that understand the interconnectedness of technology architecture, data, and processes, balanced with teams that can execute many detailed tasks. When forming the team, it is important to orient everyone on the common objective to create unity; departmental silos will not succeed. Variable capacity will almost certainly be necessary for major activities, and you may be able to stabilize your efforts by turning to trusted systems integrators or consulting partners to help guide the transition.
3. Sketch out the big-rocks project plan and manage risk: Agile evangelists often frown upon working under the heat of a mandated date and scope, but a public split force such constraints. Treat the constraints as your friend: Work backward to identify your critical operational and transactional deadlines. Ensure the cross-functional team is building in the necessary lead time, especially when financial regulations or audits are involved. Dedicate a budget, but be prepared to spend more than you anticipate, as there will always be surprises to which teams will have to adapt. As part of your project planning, create a risk management framework with your highest priority risks, impacts, and decision makers clearly outlined. When time is of the essence, contingency plans need to be in place to adapt quickly.
4. Prioritize speed over perfection: Any time a working system is disassembled, there unquestionably will be problems. The key is not to wait for a big bang at the end to see if what you have done has worked. Spending nine months planning for and three months executing this split would have introduced new risks. Instead, Subash and his team built their plan and then iteratively built, tested, and improved in an agile-delivery process. The team was able to identify isolated mistakes early and often, allowing them then to proceed to the following phases with greater confidence—not with bated breath.
5. Communicate relentlessly: In a split, every employee, contractor, supplier, or customer will be impacted. Create a communication plan for the different personas: Steering Committee, operational leaders, functional groups, customers, partners and suppliers, and individual employee contributors.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
This completely depends on the intent and level of involvement of the investor whom wants to bring in pure cash. The possible branches and scenarios could get very long (almost like binomial tree), but I will iterate here two very fundamental ones.
1) The investor brings in the cash, capital, owns certain percentage of the company based on investment, and gets involved with decision making, at the board level, and provides feedback, and holds voting rights based on the involvement.
2) They become pure investor with very little involvement and you steer the ship.
At the end of the day, decisions are to be made by CEO and the board, and regardless of percentage of investors, if you (as CEO) hold control of the company, decision making lies upon you (as well as the consequences, and deliverables). Overall, the percentages are all dependent on the valuation, the money that is brought in, equity, ...etc
Good luck,
Sincerely,
KT
Splitting the ownership and responsibilities in a company when one partner will invest more money but be less involved in operations requires careful consideration and negotiation. Here are steps you can take to determine a fair and equitable arrangement:
Discuss Goals and Expectations: Have an open and honest conversation with your potential business partner about each of your goals, expectations, and levels of involvement in the company. Clarify their vision for the business and how they see their role evolving over time.
Evaluate Contributions: Assess the value of each partner's contributions to the business, including financial investment, expertise, time commitment, and resources brought to the table. Consider not only the initial investment but also the potential future contributions each partner can make to the company's growth and success.
Consider Ownership vs. Control: Determine whether ownership percentage should directly correlate with decision-making power and control in the company. In some cases, a partner who invests more money may have a larger ownership stake but may not necessarily have a proportionate level of control over day-to-day operations.
Negotiate Ownership Split: Based on the contributions and expectations discussed, negotiate a fair and mutually acceptable ownership split. This could involve allocating a higher percentage of ownership to the partner making a larger financial investment while ensuring that both partners feel their contributions are adequately recognized and valued.
Define Roles and Responsibilities: Clearly define the roles and responsibilities of each partner in the company. Outline the areas of expertise and decision-making authority for the partner involved in operations and establish clear communication channels to ensure alignment and collaboration between both partners.
Draft a Partnership Agreement: Create a comprehensive partnership agreement that outlines the terms of the partnership, including ownership percentages, decision-making processes, profit distribution, dispute resolution mechanisms, and procedures for exiting the partnership. It's advisable to seek legal guidance to ensure the agreement is legally sound and provides protection for both partners.
Revisit and Adapt: As the company grows and evolves, periodically revisit the partnership agreement to ensure it remains fair and relevant to the changing needs and circumstances of the business. Be open to renegotiating terms if necessary to maintain a positive and productive partnership.
By following these steps and engaging in open communication and negotiation, you can establish a fair and equitable ownership structure that reflects the contributions and expectations of each partner while setting the foundation for a successful and collaborative business partnership.
