I'm planning to start a video production company for which I found a managing partner who will manage the day to day operations of the company. I am looking for advice on the equity split for both of us.
Basically all the funding will come from my side. I will also contribute to content development and use my existing connections. My partner will be the day-to-day manager as he has know-how of the industry. He will be managing the team, looking after clients and also using his connection. He is coming from another company so he will also bring in some clients.
The equity percentage that we are talking about is 40% to 60% plus a salary for him.
I am thinking of making this 30% for him and 70% for me especially since I will be handling the funding.
I need advice on how to approach the situation.
Hey there! This doesn't seem to meet the definition of a partnership, especially if all of the funding is coming from you. You certainly want to demonstrate that you value his expertise and contributions but it really sounds like you are bringing your first employee (if you are based in the U.S. learn more about how the IRS designated independent contractors from employees here http://bit.ly/IRScontractorvsemployee). Without having many other details, my suggestion is that you connect with your local economic development council or workforce council to prepare yourself for becoming an employer. Your discussions will change from percentage to salary. You might also consider developing an operating agreement for commission-based compensation on any sales that he brings in.
I really hope this helps!
Good Question! I have seen this situation on more than one occasion. The thing to understand here is that there is more than one type of equity and you two need to come to an agreement as to how these types of equity will be valued in your partnership. The first type is what you are bringing to the table CASH. This one is simple and easy to understand. Cash will be the fuel and life blood of the business. Without it there is no business. Your partner is bringing two kinds of equity; SWEAT equity and CUSTOMER equity. Remember that know-how and a client base are very valuable, and the business cannot grow (i.e. make more CASH) if you don't have know-how and customers. When partners do not come to an agreement up front as to how much they value each others contributions, disaster is always on the horizon. The best way to do this is to set up an legal operating agreement (formalizing the arrangement) and a business plan (which sets the both of you on the same page). I could start this process for you easily on a call. Best of luck.