| Startup Investing Advice Needed... |
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2AM
New Member
Cash: $ 0.70
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Joined: 06 Jan 2005
Location: Los Angeles, CA
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| Startup Investing Advice Needed... |
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Hi, I'm starting a new venture with some partners and we are trying to figure out how to quantify the equity splits on our seed capital, and since we're all a little green, I would love some good solid advice. Forgive me if I use some of the wrong terms, I'm still learning.
Here goes... Myself and my two partners have started a new venture with a 33 1/3 split each. We have an initial need for say $120k. We will finance this ourselves. In a few months we will be going out for actual funding, probably somewhere in the neghberhood of $1.2 million/year for 3-5 years. We are in a position that one of us can invest the initial $120k money and we're trying to decide how best to make this work being fair to all of us and smart about the investment at the same time.
Obviously, the easiest and cleanest way would be for us to all come up with the $40k each, not ever changing the equity. And that may or may not happen.
The scenario's that we are looking at are something along the lines of...
(A) 1 partner investing the initial capital contribution and taking an additional 15 2/3 percentage of the company. Leaving the splits to 25.5, 25.5, 49
(B) Treating the partner as an outside investor with a Pro-Rata reduction across the company, with the splits being 28, 28, 44.
Now the thing is, we want to consider a ratchet with a coupon, so the investing partner makes his money back plus a percentage, and over time as he is paid back the percentage dilutes itself back towards equal equity. We just don't know how to define this, or if this is even right/fair.
Also, we are curious as to how seeking additional investment dilutes the split, etc. I'm sure this is a seriously deep conversation, but some basic feedback and ideas would be great.
Thanks in advance.
MT
-Plan the work, then work the plan.
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Thu Jan 06, 2005 1:40 am |
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Andrew
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That is pretty tricky. I suppose you could also treat the extra money from the investing partner as personal loans to the other partners.
I have no idea which route is the most fair or makes the most business sense. Hopefully someone will be able to give you some better feedback soon.
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Thu Jan 06, 2005 5:56 pm |
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xboxundone
Senior Member
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IF you really feel teh business is going to take off wouldn't you want it in yours' and your partenrs names... Moving forward i would say leave it as equal 3 partners then treating the other as jsut a personnal loan that is applied to the businees.... Just 2 CENTS...
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Thu Jan 06, 2005 9:15 pm |
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2AM
New Member
Cash: $ 0.70
Posts: 3
Joined: 06 Jan 2005
Location: Los Angeles, CA
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Hi everyone, thanks for the feedback. I know that an equal split across the shares is easiest, and a "personal loan" from the company would be pretty easy, unfortunately 2 of the Partners don't have much collateral to fall back on if something did go south.
Still trying to figure out how to define what we are doing, I am trying to dig through some companies 10k reports online as they tend to define, or breakdown, how to work the "ratchet"
LottomagicZ4941... yes our venture is entertainment/media related, and although we are only in development, we have been met with resounding success so far. I am still green, I come from a music background, and I'm doing the best to really educate myself on some of the financial side of stuff.
Thanks again for the replies.
MT
-Plan the work, then work the plan.
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Fri Jan 07, 2005 9:16 pm |
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