Percentage allocation for my startup reasonable?


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I've developed a new product that I am going to be selling and putting on the market. I had been planning on funding everything with my own personal savings. I have a friend (Mike) who believes in the product and wants to be involved. He is not in a position to contribute financially but is willing to put in the hours promoting, marketing, and selling the product. We have talked about working together but have not discussed any numbers or how he will be compensated. I was considering offering him a percentage of the company when a recent turn of events occurred.

He spoke with a close friend of his (Donald) who has made 10's of millions buying, selling, and turning around businesses. I am told that he has been very successful and has loads of experience developing products and taking them to market around the world. Mike was simply calling Donald to ask for advice on manufacturing and got to talking in more detail about the product when Donald said that he is selling his current business, needs a new project to work on and asked if he could be involved.

We are meeting with Donald this week and I'm told that what he will be proposing is to fund the entire project and have the 3 of us run the business. In return he wants 51% ownership of the business. The remaining 49% would be for myself and Mike to work out. This is attractive to me as I would not have to use any of my own funds and someone with loads of experience and money would be running the show. (I have never taken a product to market before.) It would also allow us to accelerate the process. With my funds I would have to go at a slower pace.

I have two questions:

1) Does this sound like a reasonable proposal from Donald to have 51% with the money and experience that he is bringing to the table?

2) What would be a fair percentage to offer to Mike within the remaining 49%? Up until this point he hasn't contributed anything financially but if this deal works out he will have brought Donald into the picture and put us in a position to accelerate things much faster.

Any advice or feedback regarding these matters is greatly appreciated.

Thank you.

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asked Feb 26 '13 at 16:01
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John
1 point
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • Need more details - what is your estimated budget to bring the product to market? Staffing requirements? Inventory turn? How much is Donald paying for majority ownership of this company? – Jim Galley 8 years ago

1 Answer


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someone with loads of experience and money would be running the show

This is interesting because the term-sheet is the new employment contract. The nexus is the tradeoff between sweat and financial reward. Some points

  1. As minority shareholders, you will always be outvoted so what happens if there is a call for capital contributions? Are you prepared to be diluted down.
  2. What are the real assets of the enterprise? Is it the ideas (and thus protected under intellectual property laws) or the hours which are being capitalised? You can work out a fair wage and see whether it is accordance with the nominal share value (think debt-equity swap)
  3. co-partners ... what will be the contribution of you, Mike and Donald? If Donald is contributing "connections" it is not really a contribution as he takes them with him if he leaves. You have to only count what remains within the firm as if it is a stand-alone entity.

If you have your own savings, you can arrange to have side agreements where you can buy shares from Donald or Mike now or later down the road. What outsiders consider is that if it is such a good idea, where is the skin in the game. The equity split is only positive if there is a surplus so I'd advise looking very carefully at the business plan and who is taking responsibility/ownership.

answered May 22 '13 at 04:20
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Drllau
501 points

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