Why only offer 25% ownership of a new company.

[jeff1234]

Good afternoon all!

I am a new member and am grateful that a community such as this exists.

I live in Canada and have been approached by a friend with a new business idea that he would like to team up with me on. It will be his first business, and of course mine too.

I am very excited about the idea and feel that we both bring equal FUTURE value to the table, although today I bring much less than him. He is an experienced manager with lots of experience in hiring, training, budgeting, people management and scheduling. He is also very capable in the sales department.

I have had much less experience in the work force (being 6 years younger.) My value is mostly intangible at this point. I know for a fact that I will very quickly bridge any gap that might be apparent today.

So, this brings me to my reason for being here today:

He has offered me 25% ownership of the new company, he will own the other 75%. I am his best choice to partner with as his other options are proven to be unreliable and not nearly as easy to work with.

1. Why is he only offering 25% to me? is there a "secret" benefit to owning 75% of a corporation that I am unaware of? (He did let slip at one point 2. that he had read a book that he was afraid to let me read based on this topic, if you can name that book I would be very appreciative!)
3. Based on the future value that I will bring to the company is it fair to say I am worth 50% today?
4. I am aware that this is his idea and he could go elsewhere, but I am his best option. He will not succeed nearly as swiftly or as smoothly without a partner. Should I be firm and take no less than 49% of the company?

Any advice you have based on your experience would be very highly appreciated!

I look forward to hearing from you all.

Best regards.

[Fulcrum]

Who's putting up the money?
What type of business is this?
Who is working in the business?

As to future value, I wouldn't give this much value right now. Depending on the work that needs to be done, current value trumps future value in a startup.

[Freelancier]

3. Based on the future value that I will bring to the company is it fair to say I am worth 50% today?
Once I made a decision on ownership in a company based on "future value" that the VC's promoted. Then it tanked. So much for future value. Paid a lot of unnecessary taxes for that knowledge.
The point is your value in the company presently is the value you bring to open the doors of the company. Usually that means cash, but could also mean some other asset of value. Your future hard work... not worth a thing today.

So... if you want to make your way to 50%, offer to work toward that by hitting certain business goals you can both agree are worth something tangible and sustaining to the business.

[vangogh]

He did let slip at one point 2. that he had read a book that he was afraid to let me read based on this topic

That sounds to me like a person who doesn't trust you and is trying to take advantage of you through a negotiating tactic found in a book. That's not someone I would want as a partner.


I am his best choice to partner with as his other options are proven to be unreliable and not nearly as easy to work with

This suggests you have more leverage than you think. If you don't agree to partner with him, he has no one. That would make me ask for 50%, though based on the above I still wouldn't trust the person. FYI if you own less than 50% of a two person business, you work for the other person, because that person will get to make every decision.

This will be the first business for both of you. You might think you have less experience, but most of his experience (hiring, training, etc.) is not relevant to a start up unless this will be a start up selling those specific skills or is expecting to expand before it begins. Otherwise he has sales experience and that's it.

I obviously don't know the details here. Maybe your friend does have more useful experience than it seems and maybe he's putting up a lot of money to get the business started. Maybe he's bringing some other asset to the business like a customer list. If there are more details, please share, but based on the two quotes above it sounds more like your friend is trying to take advantage of you.

[jeff1234]

Who's putting up the money?
What type of business is this?
Who is working in the business?

As to future value, I wouldn't give this much value right now. Depending on the work that needs to be done, current value trumps future value in a startup.

We will both be putting up the start up funds, the amount will depend on our share value.
We will be operating a service business (I'd rather not share too much, an example of a similar business might be landscaping, window cleaning, car detailing, etc)
We will both be working on the business full time. I will keep my current job to help pay bills for about 1 year. He has savings and a wife which will help to carry him through the startup phase.

Thanks to all for your responses. I appreciate your insights.

[Fulcrum]

We will be operating a service business (I'd rather not share too much, an example of a similar business might be landscaping, window cleaning, car detailing, etc)

Without knowing the industry you are going to serve, it's going to be hard to give good advice. We don't need every detail, but basics do help.


We will both be working on the business full time. I will keep my current job to help pay bills for about 1 year. He has savings and a wife which will help to carry him through the startup phase.

What will you do if you get a hot turnaround job (that comes in at 1pm) that requires 20 man hours to complete and needs to be back in the customers hands by 9 am the next day? I only ask this question so that you will think things trough fully. Hot jobs like my previous example are/will be your lifeblood early on. Getting the work done faster and better, at a fair price, will keep people coming back.

Back on topic, ownership should be based on how much money both of you are putting up.

[Rob Malone]

Why only 25%? That could be a starting point. Maybe your partner is low balling expecting a counter offer. From what you have posted I can't really see the unique value you are bring to the start up.

For a start up you need cash or a strong book of business to start with. Maybe you are a marketing and sales genius who can build a book of business lightning fast - that would warrant a larger share.

But unless you bring some unique skill that will generate sales quickly then your most valuable asset is going to be cash. If you are both putting in equal amounts of cash then it seems to me the ownership should be closer to 50/50.

Here is your biggest issue, if your partner has 51% or more he can pretty much do whatever he wants, including paying himself a high salary leaving little profit for you to share in. Where a lot of partnerships go bad is that don't work out compensation and profit distribution details before the start. Get it in writing and have a good lawyer draw up the agreement. Also clearly define a mechanism for exiting and have some way to fund that.

Some of the best advice I ever got is that partnerships are not long lasting.

Good luck

[Goldnote]

(I'd rather not share too much, an example of a similar business might be landscaping, window cleaning, car detailing, etc)
We will both be working on the business full time.

In this case with a service business I wouldn't partner with less than equal 50% share. You can cut grass/clean windows/detail cars/etc just as well as he could I'm sure. The startup money for these kinds of businesses is minimal. So I don't see how he could only offer you 25%. Actually I think I'd find someone else to partner with on a business.