How much ownership/equity if any do I give a relative that wants to be a part of my start up?


1

I discussed an idea for a business with my mother and sister. They both thought it was a wonderful idea and said they would help with sales. We did not discuss compensation (probably because they both know I am generous because they both worked for be in a previous business that I owned).
I did my research, built a website, and incorporated.
My sister started to critique my company slogan among other things and said she thought it was something we should have decided together. At no point did I ever imply that I wanted to start a business with HER...
A month into the business development she called to question my decision to list my husband as VP of the corporation, stating that our relationship is volatile and that she felt she should have a 30% stake in the company and wanted a title on the corporation.
I dont know how she turned editing the content of my website into feeling entitled to partial ownership.
What do I tell her without hurting her feelings.

edit:
Maybe I forgot to state her value. She is a great sales person and I am not. She has experience talking to the right people for this business to succeed but I thought I would compensate her by paying her a great salery/commission. Am I wrong? (thanks for the very heplful responses)

Equity Partnerships

asked Jul 21 '11 at 11:37
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Lidia
6 points

3 Answers


1

This sounds more like family matters than a startup question. Seems like you're looking for advice on letting her down easy.

You could create a document (which should have been created at the time of formation, in order to avoid situations such as this) stating what share of the company is held by each member. If you filed Articles of Incorporation, I believe the number of shares of the company is supposed to be on there. Articles of Organization (at least the ones I've seen) don't include this however.

Your options seem to be:

-Negotiate compensation, either in equity or money (or both).

-Tell her that she doesn't have any stake in the company, but she can keep working for you.

-Find someone else to edit your site content.

You can explain that it was a misunderstanding, that you should have been more clear in the beginning and never intended for it to be a joint venture between the two of you, though you do value her insights and talents.

It sounds like there's a major communication problem, since there are multiple instances in your description of your sister believing she is part of your company. Communication may be something to keep in mind in the future. Best of luck.

Edit : I just realized you asked a question in the title as well. In regards to giving her equity: If her activity in the company is limited solely to editing site content, I would say maybe a point or two of equity. She might take this as an insult if she's expecting something in the realm of 30%. If she's doing more of content/site creation as well and she's basically the web side of your company, then it could be considerably more. It's difficult to accurately answer your title question without more details of the responsibilities she handles and set of skills she brings to the table.

answered Jul 21 '11 at 12:12
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Tom Harrigan
373 points

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  • Determine how many hours she has spent working on your site content.
  • Pay her for her time
  • Thank her for her efforts
  • Valuate the company (you can do it yourself based on time put in and future revenue potential)
  • Allow her to purchase / buy-in for as much equity as you want to sell
  • If she isn't interested thank her for her efforts again and continue on your way :]
answered Jul 21 '11 at 13:24
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Ryan Doom
5,472 points

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Well when it comes to it, family or not family the rules are the same. You can offer a shareholding that reflects the risk and effort they are putting in to the business. Time served, loss of income taken etc.

If she is a great sales person then a small shareholding is ok, if she is capable of running a sales team and taking over a sales direction then probably worth a fair few more shares. I have a blog on how we gnerally recommend allocating shares in Share split guidelines, these are a serving suggestion rather than a set of hard and fast rules. You may also get something out of The In-Principal agreement and issues that arise with partners.

The hard thing you have is family in your case husband and sister ... be VERY careful, you need to sit all down and be very clear upfront who is doing what.

While the legal/business dynamics are the same ... independant and at arms length ... the personal releationships make things a lot greyer. At the other end of the day, you have to balance your sister, your partner and your company.

I think the 30% sounds high from your words ... the key factor you have is effort / time contributed as a percentage of the total put into the company to date (without full pay). I would handle this by doing the calculations of effort and risk, then offering her more of a share if she is willing to put in more time and risk.

Make sure control is understood

  • the who has say for sales direction and customers
  • who has direction for product / technical
  • who has final say in a draw
  • both agree that the respective partners either do or don't get a say (and the partners understand this). Given your partner is VP does he have shares independantly of you? or is it the family that owns the shares, this is important clarify it.
  • the rest of the family agree to stay out of it and let you guys deal with issues between you.

What the sunset clauses should be for

  • You want to leave
  • Your sister wants to leave
  • You get a buyout offer
  • Your company runs out of funds and needs to close down (owning money).

If you can agree on these points, then you can move onto the next stage of writing it up and consulting an independant person on

answered Jul 21 '11 at 17:09
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Robin Vessey
8,394 points

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