equity / shares in new business proposal

[user8338]

Hi,
I am a business owner. My business partner and I have an opportunity to launch another company. Our current (2.5 year --new) business is consuming all of our time so we've turned to a friend to help us. He's written the business plan, is willing to launch the business, and is also committed to generating potential sales during the roll-out phase of the business. (I've outlined additional details below.) We've discussed giving him a percentage of the business in return for his initial work. We need advice on what percentage we should give our friend, if any, and have also considered increasing that percentage after an initial time period -- and based on a predetermined level of success.

Here are the details:

WE (my partner and I) provided the idea/concept for the new company
WE have all the contacts regarding the production and distribution of the product
WE already have a good name in a business that is related to the new product
WE have business experience
WE do not want to invest capital in the new business but WE have outside people ready to invest capital.


HE put his time developing a business and marketing plan
HE will be in charge of developing the product and building new relationships with potential customers
HE is willing to cover some of the cost to launch the company.


Without giving anymore details about the product or business ideas, can anyone help me with ideas or baselines to set the percentage WE and HE deserve in this new adventure. As you may understand, he wants us to be 50/50 but I feel like our contribution (idea, contacts and a solid name/experience) is much more valuable.

My guts tells me HE should start with 20% and have a chance to purchase up to another 29% of the company (at some kind of preferred rate let's say 25% of the actual value of the company on day 360, 30% on day 720 and 35% on day 1080) in the next 3 years depending on the results (sales and growth) the company delivers. Is that something you would recommend?

[youronlinestuffcom]

i don't put much worth in developing a business plan, anyone can say how a business will work 'in theory'.
2nd is basically what an employee could do
I'd base the % more off the money invested

[nealrm]

It's great that he developed a business plan. That is an very important step that many people do not understand and dismiss. But it shows that he put some forethought into what needs to be done.

Here is what I suggest.
Determine a base salary rate. The hourly wage should be comparable or better than similar positions in your area.
Determine a fair interest rate for the money that is contributed to the business. Typical would be prime+6%.
Determine a set of performance bonuses.
Determine a frequency for splitting the profit (yearly, semi-annual, quarterly...)

When it is time to split the profits. After costs, salaries, bonuses and interest on the investments are paid, split the remaining according to the amount invested.

[vangogh]

This is always one of those hard questions to answer and my general advice is always the same. The split has to be something you all think is fair or it most likely leads to resentment and problems down the road.

It sounds like both sides are contributing. Since he's willing to invest and you can bring in investment I'd call that a wash. Same for the idea and the business and marketing plan. After that he's developing the product and growing the customer base. You're supplying contacts to help with production and distribution. It's sounding close to equal to me. I can't say 50/50 is the right split, but I don't see it straying too far from it. If anything it sounds like you and your partner may contribute more early on based on your contacts and existing brand, but over time he might be contributing more being the one behind the product and also building the customer base.

Again though I think whatever you decide you have to make sure everyone is happy with the split or it likely leads to problems down the line.