Ideal equity distribution example
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Two colleagues ("A" and "B") want to set up a new business based on production. Both invest to initiate the company: "A" and "B" WILL INVEST the same amount. ADDITIONALLY, "B" will make a large INTEREST FREE loan available (about 4 times the investment of each) for equity in return. The loan will be repaid in full and secured with the purchased assets. "B" will not be involved with running the business. How do you suggest equity be distributed in this case?
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1 Answer
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B is just loaning money, fully secured and will get his money back? Then no equity, and a high interest rate. If you want to, you can offer a token amount of equity (below 1%) to sweeten the deal.
EDIT: after all the clarification, the remaining question is how much value A provide. A will be the CEO I assume, since B is not taking any role in the business, part from providing financing and the loan. If A is repleceable and B could start the same business with pretty much anyone, then you can imagine an 80/20 split in favor of B. But the reverse is true as well: if A is critical and B couldn't start anything without A, then it could go anywhere from 75/25 for A, to 50/50.
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Perhaps I didnt explain clearly... A and B WILL INVEST the same amount. ADDITIONALLY, B will make a large loan available (interest free) for equity in return. A will be working full time on the business. B will not. How should equity be distributed? – Ojey 9 years ago
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Perhaps I didnt explain clearly... A and B WILL INVEST the same amount. ADDITIONALLY, B will make a large loan available (interest free) for equity in return. A will be working full time on the business. B will not. How should equity be distributed? – Ojey 9 years ago
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Clarify one more thing: are you A, or are you yet another person (C)? – Alain Raynaud 9 years ago
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There is no third person (C). I am "B". (I have made the original question clearer, I hope.) – Ojey 9 years ago
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Ok, one more question then. The equal investment that A and B make, is it very large, like an investment, or is it just a token amount of money to incorporate. Will it cover anyone's salary for instance (either A, or some employees)? If so, it's a real investment. – Alain Raynaud 9 years ago
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Yes. The equal investment that "A" and "B" make is quite large, although the loan is 4 times larger than each of the investment. The equal investment will be used as part of the capital to set up the business, so in essence it will cover salaries and other costs. – Ojey 9 years ago
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Thank you for your reply. Assume A is critical to the success of the business and B cannot start it with anyone else. The loan that B is offering will theoretically be secured by assets. What could decide more accurately towards which way the split should go? 75/25---50/50? – Ojey 9 years ago
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