Partner Investor Percentages

[cneal]

I am looking at starting a small business with a friend. He will be securing the business loan of $100,000, and I will be doing ALL of the work (planning, product design, marketing, mgmnt, etc.) I will be leaving my current full time position and will be working on this business full time, and therefore will be taking a salary to replace my current income, and allow me to focus full time on the startup. My partner will not be investing any time or efforts.

I am unsure as how to calculate financial return, as I will also technically be an employee / partner.

My friend is suggesting a 90/10 split (in his favor) since he will be risking the funds and I will be drawing a salary. Problem is that with any success at all, these %'s are greatly indifferent. (i.e. $10,000 profit = $9,000/$1,000 and $20,000 profit = $18,000 / $2,000)

Any advice/suggestions?

Thanks...

[Freelancier]

The question is: could he start this with a different employee instead of you? If so, then your friend is right that his money is worth a lot more than your for-salary efforts.

On the other hand, start with the assumption that if he were to invest these funds in any start-up, he would hope for somewhere in the range of "getting my money back" to "a twenty-bagger", but the possibility still exists that at the end, there's no money left and he's left holding the bag with the loan and no way to pay it off from the business.

If I'm in your friend's shoes, I structure it 100% mine to start, with you working on a low salary + equity stake that increases over time as you hit milestones. In other words, when the product is ready for market, you get 10% equity stake. When you sell the first $100,000, you get another 10%, etc. That's an example, the right numbers are up to you two to negotiate. Over time, the goal is that you own more, are able to take more of a salary from cash flow, but also that you are incentivized to hit your targets as quickly as possible, while continuing to protect my investment as best as I can.

[cneal]

Thank you Freelancier. That is pretty much what I was thinking. My friend has the money and the idea, but no wherewithal to take it any further without my help and experience (and a lot of time)

I would think that our goal and business plan would focus on getting the initial investment repaid ASAP, and at that point we both have the opportunity for financial return and future development capitol.

Cheers....

[NorthStar]

Be careful here, I have a friend with a partner that put up very little investment and does absolutely nothing for the business, yet expects 50% profits. Not a fair trade to the one who is doing all the work...

Friend or Not? Negotiate and Conclude "IN WRITING" before moving forward.

Best of Luck!

[CCAdamson]

Freelancier is right. The money (and the idea too) is where the risk is, if you fail you are out nothing but a job but he is stuck with a $100k in debt. The 90/10 split is generous on his part.

On thing I will say that I hear about a lot, people leaving their full time job and looking to "replace" their current income with their startup. That isn't always the case. If you make $125k a year you can't expect to take a $125k salary out of a startup. I'm not saying you are doing that I am just keying in on what you typed in your original post. I know someone who started their own business and immediately started drawing a salary very similar to the one they had at their FT job. The business couldn't sustain that salary at their slow rate of growth. They readjusted the business plan and the salary and now are successful.

[KatieKats]

My friend is pretty active investor and businessman - he was in countless JVs and he was always telling me, that no matter what - if you go in JV with just one partner, no matter what are circumstances - expect 30% of the profit, or just bail. He said it that if you would put only 10% and your business would slowly starting growing in popularity even if it would make $10K profit on $1Mil revenue you couldn't survive on that, but your friend would be still OK.

[JP Morgan]

My friend is pretty active investor and businessman - he was in countless JVs and he was always telling me, that no matter what - if you go in JV with just one partner, no matter what are circumstances - expect 30% of the profit, or just bail. He said it that if you would put only 10% and your business would slowly starting growing in popularity even if it would make $10K profit on $1Mil revenue you couldn't survive on that, but your friend would be still OK.

That kind of money is easy to come by. I used to raise $100k to $500k from older guys for real estate deals all the time and paid out 15%. Why? -Because when you calculate the profit and compare a % interest rate payout vs. a % of ownership, the later is a much better deal for you the owner. If it's his idea, I would say maybe you go 50/50. Otherwise, get your own idea and then ask an investor for 4100k and give a 15% return to be paid back in 3 years, or give maybe a 10% preferred rate of return and 10% ownership, something like that. Your deal is very small potatoes and it's not like he's offering you $1M or anything. Think Big my friend, or just go to work for a really good small company and get a strong salary and stock pops (options) and sleep well and enjoy your weekends and vacations. For you to even consider this deal, I know you need to start by reading 50 books about business to start. Used books from Amazon.com and the local university library my friend. Then you will learn the art of OPM.....Other People's Money. ~FYI-Microsoft just raised $10B at 2.75% for 20 years. Now that's how you do it!!!!

[JP Morgan]

In the beginning I meant to say the prior is a better deal. Interest rate instead of ownership if it can be avoided. Tie the loan to an LLC and then if it doesn't work out, it's possible to BK the LLC and save your personal credit. 15% is a risk, people/investors know that.

[Paul]

The deal should be based on the business loan. He is NOT investing his own capital, he is securing a loan, although he is at risk. Negotiate based on the loan being repaid. Once repaid go 50/50 or better on your side.