Starting a Biz

**jshaulis** · 04-19-2009 07:52 PM

I have a question/problem. I am in the research phase of starting a business. I have approached 2 others that I would want helping out and being owners with me.

Problem, I plan on setting up a s-corp and would like to maintain over 50% stake in the business. The other two guys I spoke with feel like it should be a equal split. How can I convince the other two guys that I should get the majority share and they split the other half?

**jshaulis** · 04-20-2009 07:16 AM

Does anyone else have problems like this?

**Chris Brooks** · 04-20-2009 08:12 AM

Hmm that is a tough situation. What are your reasons for wanting that much stake besides being the one starting it? In other words, after you business has gotten its feet wet what can you continually bring to the table that warrants you a 50+% share in the company?

After you have those answers approach the other members and ask them the same question. Once you have the answers to who can continually bring in what consistently it could be easier to make a choice.

Does that make sense?

**jshaulis** · 04-20-2009 08:59 AM

It makes perfect sense...I just don't like the answer. I just feel very strongly about this and know they could run it just as well as I could. Maybe I will push for a 40-30-30 split instead being it was originally my idea.

What I have provided so far to the group is 2 months of research and many spreadsheets showing the profitability and the like. In the future the work load will be pretty even.

Is there a way to protect yourself from none-working owners? If someone started out putting in the time, but just stopped but the company continued to develop and run successfully, is there a way to get rid of them? I do not believe this will be the case, but I need all my ducks in a row before I pull the trigger. Thanks,

Justin

**Chris Brooks** · 04-20-2009 11:08 AM

As for the non working owner. I would have it in the s-corp agreement. You could maybe spell out check points each individual needs to meet and if they don't meet them they would loose part of their stake.

I would just try to get anything and everything in writing. You don't want to come off a paranoid, just prepared. Does this help?

**chicon** · 04-20-2009 12:02 PM

Your percentage ownership should be based on the value you bring to the business. In very few cases is this just the idea. I am a serial entrepreneur who was approached with an interesting idea. They offered 50/50 split. Their only contribution was going to be the idea. No surprise but I declined the offer. If you are bring 80% of the value (capital, skills, experience, contacts, know how AND work effort etc) you should bet 80%.

**tableboy** · 04-20-2009 10:54 PM

simple if you are working hard than you deserve more.

**BusinessAdviser** · 04-20-2009 11:51 PM

It comes down to negotiation. Regardless of what you bring, you need to try to keep as much as possible to make it happen. Remember that even if you own more than any single member, you may still have a minority share. Why? If you give up enough to arrive at 40-30-30, your partners can run the company. They have 60 to your 40.

**FrioGott** · 04-21-2009 11:31 AM

Originally Posted by BusinessAdviser

It comes down to negotiation. Regardless of what you bring, you need to try to keep as much as possible to make it happen. Remember that even if you own more than any single member, you may still have a minority share. Why? If you give up enough to arrive at 40-30-30, your partners can run the company. They have 60 to your 40.

BusinessAdviser is oh so correct. You must absolutely obtain 51%. Was this originally your idea? I would say if it were yours that would mean that you have the most determination to see it succeed. It is like your child. You want to grow it into something that will make a mark in the history books. Unfortunately if one of your partners is bringing all the start-up bread to the table. You cannot succeed with out their help. So I would put something in the by-laws, that states you have absolute final say in what ever the matter may be concerning the welfare of the company, unless such decision would destroy the lively-hood of the company. Assuming that is still legal in accordance to federal law.

**jshaulis** · 04-21-2009 01:54 PM

Originally Posted by FrioGott

BusinessAdviser is oh so correct. You must absolutely obtain 51%. Was this originally your idea? I would say if it were yours that would mean that you have the most determination to see it succeed. It is like your child. You want to grow it into something that will make a mark in the history books. Unfortunately if one of your partners is bringing all the start-up bread to the table. You cannot succeed with out their help. So I would put something in the by-laws, that states you have absolute final say in what ever the matter may be concerning the welfare of the company, unless such decision would destroy the lively-hood of the company. Assuming that is still legal in accordance to federal law.

That is how I feel, I just have to sell it too them that way. It was my idea and it is semi-original. The ones around us are poorly run at best and the one guy currently does this but not as a business. I have figured out if it is profitable and how much time/effort and paperwork dealing with it, etc.

What is the standard split if I had the idea and would run it, but had zero capital? This is not the case, but I am just trying to find a angle to work with here. Thanks,

**BusinessAdviser** · 04-21-2009 04:43 PM

Originally Posted by jshaulis

That is how I feel, I just have to sell it too them that way. It was my idea and it is semi-original. The ones around us are poorly run at best and the one guy currently does this but not as a business. I have figured out if it is profitable and how much time/effort and paperwork dealing with it, etc.

What is the standard split if I had the idea and would run it, but had zero capital? This is not the case, but I am just trying to find a angle to work with here. Thanks,

There is no "standard split," other than that you don't want to give up more than 49% of the company, if possible.

**mcstartup** · 04-22-2009 07:23 AM

Originally Posted by jshaulis

Problem, I plan on setting up a s-corp and would like to maintain over 50% stake in the business. The other two guys I spoke with feel like it should be a equal split.

I have a feeling you are getting a bit ahead of yourself in terms of picking the business structure and worrying about the 50% ownership thing. Generally I don't recommend people choose S-Corps as their business structure. There are situations where it makes sense, but in 95% of cases, either an LLC or a C-Corp is the way to go. If you have a specific reason for picking an S-Corp I could probably lend an opinion on that.

As for the ownership -- there are about a thousand ways to maintain control even if you give up more than 50%. You could control the board of directors. You could have a different class of stock than the other folks. Or, you could have shares while they hold options. In any case, I would strongly recommend that your partners (and you) either take options over shares, or if you must have shares, then enter into a restricted stock agreement that lifts over time (and thus vests like stock options).

This is how you can protect yourself from getting engaged with someone who doesn't work out, quits, or goes insane. If they have stock and walk away, then there's nothing you can do, unless there is an agreement in place that addresses that situation ahead of time.

I've written a couple blog articles about those topics in the past at www(dot)mcstartup(dot)com. Click on past articles, and then look for the article on structuring equity for the founders, and the one on choosing a business structure.

Please pay special attention to the equity structuring. I've seen far too many cases where people get screwed because a partnership doesn't work out and someone walks away with a big chunk of the company. It can only get ugly from there.

Hope this helps -

Jeff

**jshaulis** · 04-22-2009 08:42 AM

Originally Posted by mcstartup

I have a feeling you are getting a bit ahead of yourself in terms of picking the business structure and worrying about the 50% ownership thing. Generally I don't recommend people choose S-Corps as their business structure. There are situations where it makes sense, but in 95% of cases, either an LLC or a C-Corp is the way to go. If you have a specific reason for picking an S-Corp I could probably lend an opinion on that.

As for the ownership -- there are about a thousand ways to maintain control even if you give up more than 50%. You could control the board of directors. You could have a different class of stock than the other folks. Or, you could have shares while they hold options. In any case, I would strongly recommend that your partners (and you) either take options over shares, or if you must have shares, then enter into a restricted stock agreement that lifts over time (and thus vests like stock options).

This is how you can protect yourself from getting engaged with someone who doesn't work out, quits, or goes insane. If they have stock and walk away, then there's nothing you can do, unless there is an agreement in place that addresses that situation ahead of time.

I've written a couple blog articles about those topics in the past at www(dot)mcstartup(dot)com. Click on past articles, and then look for the article on structuring equity for the founders, and the one on choosing a business structure.

Please pay special attention to the equity structuring. I've seen far too many cases where people get screwed because a partnership doesn't work out and someone walks away with a big chunk of the company. It can only get ugly from there.

Hope this helps -

Jeff

I will check this out. I have actually been doing some research myself and was starting to lean towards a C-corp. I am not too worried about what type of corp/llc I set up as this will be a small part of the big picture. I just want to make sure I am protected against bad things happening. I will check out your site/blog.

**mcstartup** · 04-22-2009 12:10 PM

Good luck. If I can help, just let me know.

Jeff

**myfayt** · 04-22-2009 08:23 PM

Do a 60/40 split.

If they put in an equal amount of money with you to start it, then they deserve 50/50, if they didn't put any money in do a 80/20. Just judge it by what they put in, and explain to them why you want to do it that. If someone puts $10,000 into a business and I put $10,000 in the business, I better get 50/50.