|What percentage of my business should I give away?|
New business from scratch I am investing £2500 and my my business partner will be investing the same amount.
I am thhe one that develops all the sites etc and it is me that has the contacts for the products etc etc.
Really the partner is only offering money up front and will be helping pack orders and odd jobs that I ask them to.
What would you suggest guys? I dont think 50% is fair and that is what they have hinted at!
# I'm not a lawyer, don't act on anything below without taking advice from someone qualified to give it #
For £2500 I'd go to the bank. It's a small amount of money and should not allow the 'partner' to have 50%. The bank will not ask for a percentage of your business, they will ask to be paid the money back plus interest, this gives rise to cash-flow implications and you will probably be securing the debt even if you think otherwise.
Your time, contacts and expertise should be factored into the equation. Packing orders and doing odd jobs is not contributing to growing the business.
If you can't get the whole £5000 yourself then why not offer a deal where the company can buy back shares from them at an agreed rate. This minimises the upside for your 'partner' so should be at a reasonable multiple based on the risk involved.
e.g. If it's only 25% likely that you will make a success of the venture then offer £20K as the buyout. This is based on doubling their investment * risk.
80% sure = £6250
60% sure = £8333
50% sure = £10000
40% sure = £12500
30% sure = £16666
25% sure = £20000
20% sure = £25000
10% sure = £50000
You need to be careful when allocating shares and striking such deals as you don't want to be in the position where the person is entitled to 50% of the profits as dividends before any buyback/partial buyback can be executed. You can also see that the riskier the business, the larger the buyout should be.
I would also always insist on having 51% or more, 50:50 deals are a recipe for disaster. Check out legislation in your company as it may take much less than 50% for someone to force an issue to an impasse (25.01% is common).
If you go down the buyback route then you should agree that you get a decent salary when possible and money that is left over is used to fund the business first then any additional profit should go to the buyback.
Hopefully, when you are doing well, you will own 100% of the business and you will have a happy ex-'partner'.
Edited to clarify ambiguous sentence.
Equity can be one of the most advantageous items to have. In this case it sounds like YOU are the business with your skills, contacts, and money you are putting up. That being the case a simple $2,500 wouldn't be enough to have me give up any stake in the company. If the person was bringing the cash AND skills that were invaluable, read, required to get or keep the business growing than MAYBE consider an equity position. Otherwise I would agree with the above post go to the bank or use a credit card.
I have an import/export company I am putting together that will sell the products over the web. I need a database programmer to help me with some of the web development, he will be paid cash not equity. I expect the business to be quite successful someday and no amount of web programming in the beginning is worth that slice of the pie.
Thanks for the excellent replys. I will speak with him and see what his views are and report back here.
I agree- for such a small amount of money, credit is MUCH better than equity for financing your business at this point.
Remember- loans are around only until they're paid off. Partners are around forever.
Are now at the 40/60% mark.
Im alot more pleased with this.
If you are determined to make this an equity relationship instead of a debt relationship, I would look into the UK variation of a U.S. partnership then pay yourself and your partner appropriate salaries BEFORE sharing profits.
In other words, you both put up 50%, so you are both 50% partners. You do 80% of the work, while the other partner does 20% of the work; make your salaries reflect that and agree to the amounts AHEAD OF TIME. At the end of the year, whatever profit is left (after deducting salaries and other expenses) is split 50-50.
If the dynamics change and your partner takes on more responsibilies, you can increase his salary just like any other employee.
Trying to go forward with just a simple profit sharing split that doesn't accout for the actual work performed is a recipe for diaster.
He will be performing the packing - invoicing - telephone calls etc etc
Where as I will be doing the whole designing side of it.
Thats something to think about.
Think this through, I had a business once split between three, including myself, equal shares etc etc equal pay.
Except one partner left and got a job and didnt do anything with the firm, the other one was a lazy so and so, It came down to me to do all the work in the end.
Becarful and avoid this situ if you can, try and borrow the money.
Not matter what though, do not take on a friend or family member as a partner. Itll end in tears.
Good comments all round. I'll add my .02 pence because I am about to enter an exactly similar situation. make sure that you have a written down and signed agreement with all the different sides of the agreement clearly stated
make sure you mention escape clauses if you see that the partner is not pulling his weight
mention dicision making processes and wheight in the decision making process in the agreement. You could bring your business to its knees if you can't agree on a decision
make sure that you have a written down and signed agreement with all the different sides of the agreement clearly stated (mentioned twice on purpose ;))
I normally don't post too often, but this is something I've learned a lot about personally and through research (bschool), so I'll just say it: you're getting a bum deal. Even at 60/40. I'd avoid paying equity altogether. Equity partnershps are very tricky, and fail more often than they work.
From your description of the division of tasks and the other person, this person should be an employee, not a partner. Unless he is: a very creative idea-generator (someone who you know will generate additional revenue for the business independently of you), adds something unique (like contacts, which results in more revenue), or has some uncommon experience or skill-set (which would require paying him equity to compensate for a lower salary, again resulting in more revenue), equity is not a good option. It gets tricky both personally and legally.
What happens if he quits after six months? Does he fully keep the equity and get to ride off of your hard work? What vesting clauses will you have? What happens if you want to buy him out, but he just won't sell? What protections will you put in place for that? As a majority share-holder, you also have to be careful you are not taking excessive advantage of your majority position (e.g., if you pay yourself a high bonus which you feel you rightfully deserve, but he disagrees with, it could be a legal issue which you'd rather not deal with). Do you know that he might also have a claim to any derivative/related businesses that emerge from the founding company?
Eventually, maybe not in the first few months, but inevitably, you'll feel a sense of unfairness for being a more important part of the business. If the two of you are good friends, you might also lose something more important than any dispute over money.
As they say: a friendship founded on business is better than a business founded on friendship.
Alternatives: get a bank loan, as others have suggested. The big draw (and likely initial allure) of having a partner in a start-up is the psychological support - but this is very much a short-term benefit, if you think can pull it off alone. I think this forum is full of folks who've started off without equity partners - you'll find plenty of support here and locally if you look around.
Again thanks for all the great input.
Something I have not mentioned already.
We want to grow very quickly and have decided that the best way we can do this is to move in together.
Im still very young so we can both run the business from home.
The motivation side is most important to me and if this heads where I want it to and it should with hard work. My 60% sure will be alot of money and I can live with that I think.
Like most here my advice would be No to an equity agreement but if you are determined then you may need to think differenty
Many here will agree that having enough time to perform all the tasks when running your own company is the biggest problem , it doesnt matter if your stuffing envelopes or writing code there are only so many hours you can work on any day so my view is with equal partners putting in the same amount of cash makes them equal partners , but the crux of any partnership is both partners putting in equal time and effort
So my advice if you are determinned is to base profits on hours worked i.e. if one partner works 3,000 hours in the year and the other works 2,000 hrs in the year profits should be related to effort
This way if YOU OR YOUR PARTNER get fed up or slack off the partner doing the work whether packing or coding will earn the lions share
best of luck on your venture but will remind you once again partnerships are fraught with danger and can be the cause of a good business idea failing
Well after speaking to my father he said he would borrow me the money on a business side of things.
Anyone care to share there views on this.
Borrowing money from friends and relatives/friends has the same type of potential for bad as going into business with relatives/friends. But is can also work very well. Make everything professional and keep the business aspects separate from personal.
Just like drawing up a partnership contract before starting the partnership, you should draw up a loan contract with your father. Include the interest rate, payment terms, and consequences for non-payment.
Not sure about tax issues there, but in the U.S. the interest you pay on the loan would be deductible for your business and taxable for your father.
£2500 - put it on a credit card...
>Well after speaking to my father he said he would borrow me the money on a business side of things.
A totally personal opinion.....I trust my father more than anyone else in the world.....so if you have to borrow money, your Dad would be a good choice!
Now, the bad news. 2,500 pounds...what kind of business is this? You can't raise 2,500 pounds on your own?
I might have looked to my father for millions, but not for a few thousand!
I chose not to look to my father for the money to run my business. I chose to scrape it up from the gutter the way he did! It was a respect thing.....asking for money from your parents will always get an easy yes answer, but, should you really not want to achieve the goals on your own?
If your business hangs on a 2,500 pound loan, well I'm sorry, but, it is most likely to fail!
IMHO all businesses should be able to run loan-free, if they can't they are dangerous investments!
Occasionally, when large sums of money are involved, borrowing becomes necessary, but, that is resticted to the multi-million/billion businesses, not a few thousand of pocket change!
Well its £2500 from him and £2500 from me.
$10,000 is hardly pocket change! Or maybe your just filthy rich.
There is also hardware that needs to be purchased besides the £5000 and that is just for initial buying of the stock.
I think the point that percentages was trying to make is that in the course of business there will be a lot of times when cash flow will be low (or negative). So if you are having problems getting £2500 at the initial stage, how are you going to deal with the inevitable £2500 shortfalls that will come up as you go along?
Lack of planning for cash flow is one of the biggest killers of new businesses. So if £2500 puts you in a make-or-break position from the get-go, it sounds like you're starting from a very shakey/dangerous position and may want to rethink your business.
|Lack of planning for cash flow is one of the biggest killers of new businesses. |
I completely agree. As my finance teacher in college used to say cash is king! Raising capital and having access to lines of credit has been the single most important factor in my entrepreneurial activities even in front of the actual business idea itself!
If you plan on growing the business or starting others developing these skills and sources of capital will be critical. Good luck.
Thanks but the 5k is more than enough for this business.
>So if £2500 puts you in a make-or-break position from the get-go, it sounds like you're starting from a very shakey/dangerous position and may want to rethink your business.
That is exactly the point I was trying to make!
£2500 is enough to pay one person for one month without any other overheads! A business can't possibly succeed on that type of budget. Cash flow will kill you!
You have to be real, you need at least 100K to start a business, and even then it will be on a shoe-string budget!
I started my first business on 100K of savings and it was very, very tough! I was down to the last 5K before it started to make a profit (just in time, and even tougher).
|Thanks but the 5k is more than enough for this business. |
It is interesting to note how your perspective on business and success change as you get older. I remember when I got my first bank loan for a $1,000 dollars and thinking I was on my way to business riches! That was many years ago and several businesses later. Now I have sources of capital that make this look like a joke and often think I need access to far more depending on what project I am working on.
It is good you start out thinking that the 5K is more than enough, it teaches you think like a bootstrapper and get creative to stretch cash, but you should understand if you hope that the business will truly grow into a large profitable company that you can sell or leave to the next generation that cash flow will be key and the 5K may not be even close to your needs.
|You have to be real, you need at least 100K to start a business, and even then it will be on a shoe-string budget! |
I half go along with percentages statement above. I have started businesses that didn't require a fraction of this capital to start, albeit I wasn't starting the next Microsoft or Wal Mart, but they were decent businesses and were reasonably successful.
I don't think you need this type of cash all the time, although in certain situations or businesses you would and possibly even far more. It really depends on what type of business you are starting and how fast you want to grow the business. Many small companies can be started for far less and with creative bootstrapping and a lot of sweat equity grow slowly into a decent little enterprise. Other types of business would make this impossible.
[edited by: Fortune_Hunter at 9:39 pm (utc) on Feb. 10, 2007]
I have decided that I will go ahead and be a one man band. Im sure I can stretch the money for all its worth :P
Percentages: Its all relative, you were lucky to have been able to have that kind of money with in reach, not all do.
I know I didnt in my late teens, a few hundred pounds was a lot then, a fellow Indian student offered to loan me money buy a house outright, to him it wasnt much (£26000) and he was helping a friend out.
Funny old world.
Good Luck, you will need it. It is not easy bootstrapping a business with such a tiny amount of cash. AS someone already pointed out, it doesnt even cover wages for one employee for one month. You do realize that you will be working for free for the first months/year, right?
It can be done. Live at home, eat ramen, don't spend any money on fun things. Eventually you can build up the cash flow so that you have a budget to make things happen. My business now has weekly cash flow equal to the start up capital, so things are easier.
Good Luck. I hope it is a business that it unique, and not just selling the same product as everyone else.