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.
One recommendation is to actually evaluate how much your company/idea is worth. Figure out the numbers first (maybe pull in a financial adviser or an expert in evaluating your type of venture). If you realistically evaluate your company at 1 million dollars and he is investing 10% of that, then he would be entitled to 10% equity in the company.
The risk of giving too much away at the beginning (i.e. giving 40% away for only 10% of the funding) is that when you do need more money, you may need to find an additional investor. Now your investors each have 40% and you have lost control of your company. I recommend doing a little more homework on what your company is really worth. Otherwise, ask him for a loan instead -- until you understand the value of your business.
Whatever you decide - make sure you have a written contract with exit strategies clearly outlined. (i.e. what are the steps you agree to do if the business doesn't work out, or if one person wants out).
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.
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.