Real Equity Division Problem in our Business

**SeanConway** · 08-20-2008 04:05 AM

Thank you everyone this is a situation that we needed handles quickly.
My business partner and I are launching a web start-up and we needed to boot strap last minute so there are some equity percentages we are having difficulty figuring out, seeing if any of you could help.

We started developing this student service website nearly 10 months ago and now we have to launch in less then one month because students are back in school. We initially each put in $8,400 for website development and attorney fees. My business partner and I worked similar hours for the past 10 months but now he has to attend school full time and I will be working on this project full time with after graduating from college more then a year ago.
Just recently we decided not to go with investors because they were asking for too much of the company.

I decided I was going to bootstrap this project attributing $20,000 more while my business partner contributed $5,000 to make his total $13,400 and my contributions total $28,400. For the next 18 months while he is in school earning his BS in Accounting I will be working 80% more then him. The 5 year company value is expected to be around 27,000,000 at 5 times EBITDA. However, there is a lot of risk associated right now during the pilot program then we will have to go for a large investment once adoption has been shown.

The equity is now 50/50 how would you go about dividing it now considering the additional capital and time I will be contributing. Please help, any numbers thrown out there would be appreciated.

**StealYourDreams** · 08-20-2008 09:26 AM

28.4 + 13.4 = 41.8

28.4/41.8 = 68%

100-68 = 32%

Take a salary based on the time contributed to the business.

**rogercbryan** · 08-20-2008 09:51 AM

People often mis-attribute investment capital to equity ownership. This is not always how you do it. The first goal any business should have is recouping its investment. So you can be 50/50 partners. The only difference is that you should get your investment back first.

You $28,400
Partner $13,400

You should get the first (after salary) income up to $15,000 to make the investments even.

The amount of work you are going to do should be geared toward the salary you take. If you are going to be doing 80% of the work you should get 80% of the salary income you generate. You should try to create a cash flow that takes all of this into account. If you want your investment back in the first year then make a plan that does that. Take back your investment before anyone gets a salary.

If you are already 50/50 partners then you should not try to change that. This can often lead to an argument that could kill the company before you even launch. Play with the numbers... they can work...

**StealYourDreams** · 08-20-2008 11:15 AM

Originally Posted by rogercbryan

People often mis-attribute investment capital to equity ownership. This is not always how you do it. The first goal any business should have is recouping its investment.

I have never worked at such a place where contributed capital was considered a loan to be repaid.

So you can be 50/50 partners. The only difference is that you should get your investment back first.

"Can be" is the key word here, equal distributions are almost always a bad idea.

You $28,400
Partner $13,400

You should get the first (after salary) income up to $15,000 to make the investments even.

I dont understand the obsession with taking your investment out as soon as possible. I cant think of a situation where I would recommend that someone take out X so that the person and his partner have an equal stake. The capital is better used towards building the company whether that be inventory, working capital, FF&E, etc.

The amount of work you are going to do should be geared toward the salary you take. If you are going to be doing 80% of the work you should get 80% of the salary income you generate.

This is very confusing. Please elaborate on "salary income." Income is income and salary is salary. The amount of hours, skillset and complexity of the work should dictate salary. I would suggest that early on, when you are unable to pay a salary, that you let it accrue.

Take back your investment before anyone gets a salary.

one way to do it I guess.

If you are already 50/50 partners then you should not try to change that. This can often lead to an argument that could kill the company before you even launch. Play with the numbers... they can work...

The equity distribution at inception is never the same as it is at exit. I would only do 50/50 if given no other choice. It appears that there are a lot of choices here.

**rogercbryan** · 08-20-2008 01:09 PM

Every business plan I write now shows the investor how they will get their investment back before any income is distributed as equity disbursements. I've found that people are more willing to invest when their is a time line as to how they get their money back. To me this is the smartest way to run any business. It gives you a risk equation based on amount invested and the amount of time it takes to recoup that investment.

Salary Income was a bad term to use... When you do your budgeting it would be the amount of money you are setting aside to pay participating owner salaries which is often a % of income. This is different then distributions which are payments on earnings after expenses.

**SeanConway** · 08-20-2008 07:13 PM

Thank you everyone for your help!

**SeanConway** · 08-20-2008 07:22 PM

I missed mentioning in our pro-forma that we won't be profitable until year 2 so I will be living on savings, until we have another investor come in and able to give a lot of capital and I am able to take salary from there. Would this change the situation at all

**rogercbryan** · 08-20-2008 07:39 PM

Originally Posted by SeanConway

I missed mentioning in our pro-forma that we won't be profitable until year 2 so I will be living on savings, until we have another investor come in and able to give a lot of capital and I am able to take salary from there. Would this change the situation at all

Eeek... you will be in business for 24 months without a profit? That's extremely long for a business with this amount of capital expenditures. Are you saying that you will be completely even (recoup of all investments) after two years. Or are you saying its going to take 2 years to reach a positive cash flow?

**SeanConway** · 08-20-2008 07:45 PM

Good question...I mean a positive cash flow.

**StealYourDreams** · 08-20-2008 10:38 PM

I'm not a .com guy at all, but two years AFTER launch before you start drawing a salary seems like a long time.

I can see if you were in the development stage pre product/widget/gadget/website release, but two years after? Seems to me that either you are being extra cautious and overestimating expenses, underestimating demand, or operating severly underfunded.

If someone tells me 24 months I assume 36, especially if it's an individuals first rodeo.

I understand these things take time. I started my current project in January 2007 and put $125,000 of my own money and $125,000 from by business partner. We burned through 7 figs. of investors money and are still 90-120 days out from product launch. However, this year I started drawing a salary.

My salary fully disclosed to all investors and is not an issue. I'm not saying this is what you should do, I'm just giving you things to think about.

Good luck