Is sleeping partner considered as investor?


2

My partner and i are from different countries

(1) My partner will fund the startup idea
(2) I will be the working partner and the idea will be executed in my home country

Please give your advice on the following..

(a) Will my partner be considered as seed fund investor in the business?
(b) How the equity will work between us?
(c) How compensation (Remuneration i mean) work between us?

(d) What question we need to answer to keep this association going over a long term?

Thank you for all your support and suggestions

Ideas Legal Investment Partnerships Seed Funding

asked Oct 6 '11 at 02:06
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Bt001
11 points
  • sleeping partner n (Business / Commerce) a partner in a business who does not play an active role, esp one who supplies capital – Joseph Barisonzi 8 years ago

2 Answers


2

Yes, your partner is a seed investor. Equity will work between you pretty much based on what you agree and write down between you.

There are a lot of models, including "just pick a percentage" but my current prefered model is as follows:

Basically you need to translate the hours you work into an agreed "amount of money" so that you both have a common ground to discuss your position rationally. You may also bring on other people as you go along so the principal should apply to them as well.

  • Use the wages you would get externally in 1-2 years as your measure. Lets say $100K each for a year to make the Math easy.
  • If you contribute time for free then their "equity earning" should be around 3x the normal earning (this 3x is changable). Thus 1 year sweat equity is worth $300K in shares.
  • If your partner is investing money then they are taking a risk too, so the amount of money you invest is worth say 4x ... thus they invest $100K their investment is worth $400K and your time investment is worth $300K

... thus you have $700K in "investment" between you and you have your percentage splits. 4/7 and 3/7 respectively ... as new people come on they can have the same rules and the calculation continues to work. You can vary the "multiplier" per person based on the risk they are starting with.

As you start to earn money people will need to start being paid "something" for their effort and so they can live ... the difference between your agreed amount of $100K and the amount you can afford eg. $20K gets the multiplier effect and can either become shareholding at the 3x rate OR can be seen as a loan to the company which is paid back as the company improves.

You will want to agree on who gets paid out first, or more likely at what ratio payout occurs (eg. $12 to money investors for every $10 sweat investor) so that they can get their money back in the event of a buyout that doesn't cover the total.

answered Oct 6 '11 at 09:07
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Robin Vessey
8,394 points

0

By "sleeping" do you mean a silent partner? Are you sure he will not want to have a say in the running of the company and just provide the funds?
To answer all your questions c-d, basically, you both decide. There are no rules when it comes to agreements who gets what when, etc. The rules you hear about (i.e. must have 51% of the company to rule it) are only in cases where the contracts fail to be specific and the judge has to go by some kind of general guidance.

answered Oct 6 '11 at 02:12
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M.G.
51 points

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