Questions

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.

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


Answered 6 years ago

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