We are looking to start up a business and are in a different situation then I have been in before. I will be looking at financing the money that starts the business.
I have one partner that will be using sweat equity as his way of buying in and the third partner is actually the manufacture of the product and will be a silent partner. The deal is, whatever I buy in equipment, he will double for a small percentage of the company. Probably about 10-15%. The rest of the cost will be on me. I estimate it will cost me around 150k. His contribution will be around 60k. How do I split shares up with the three of them.
I realize that it is my loan technically and that I need to pay it, not the business. But the sweat equity person can't finance......so I'm not really sure how to iron this one out. Because technically he will not own anything until the sweat equity I.O.U is paid for??? correct? Thanks
There are a lot of other circumstances you'll want to consider beyond equity. I think it would be ill advised for anyone here to tell you how to structure this deal. In a scenario like this I highly recommend that you get a good startup attorney who can sit down in the same room with the three of you and discuss your options. I recommend you seek an attorney/law firm with a lot of experience structuring M&A deals or venture capital deals. You should have no problem finding them if you look around. The advantage is that you will have someone who has seen all of the things your concerned about, they have written many contracts and term sheets where one side invested money and the other side invested time and effort, and they know how to plan for exits, mitigate risks, etc.
Something to consider going into your first meeting with the attorney: it's not unusual to issue two classes of stock so that partners are given preferred shares for their investments and common stock for their involvement, and with some kind of vesting period for the common shares (which I believe addresses your question about sweat equity paying off your partner's debt). Just discuss your options here with your attorney. Stock plans like this keep people motivated. You either bring real, immediate value to an organization or you don't. The moment someone stops contributing they become a detriment to progress, Especially on a small team. The equity structure should reflect that.
For my part, rather than tell you how to split up your shares, I advise you to:
1) have every single decision regarding equity completely documented from day 1. This cannot be understated. It's so important that it's a cliche. If something goes wrong that should have been documented, but wasn't, then you only have yourself to blame.
2) have the expectations for vesting/keeping equity equally documented.
3) create a document with roles and responsibilities that breaks down every role that your company will need to fill when it is successful, so that you can all agree on who will wear those hats in the meantime. As the company grows, hats will be passed to someone else. But until that time you cannot afford to have any confusion about who is responsible for what. Even if your goal is to have a "flat" company, at the end of the day someone needs to be accountable for each area of your business. Not to mention, when everyone is completely in agreement about these hats, AND everyone is comfortable with the hats their wearing, then great things begin to happen because confidence and competence are high.
4) have a plan for acquiring talent and potentially even new partners, and make this a discipline. All three of you should agree to this upfront. It's never bad to have talent queued up, and to be interviewing potential partners. You will even find that interviewing candidates regularly, even when you're not looking to hire anyone, will keep you energized and will make you really good at pitching your business. Every interview is an opportunity to tell the Company's story - briefly.
5) if you don't have a business plan at least agree upon a basic definition of success, or a vision, and write it down so that you have guiding principles to adhere to.
If the company fails, you want to make sure everyone knew what was at stake going into it, everyone knew what was expected of them, and that everything was "above board" the entire time. You don't want to be in a finger-pointing situation later. And if the company starts doing well, you might have even bigger issues if you don't document expectations. When one partner doesn't pull his/her own weight while the others are ramping up the business, that can be a huge drag.
Just meet with an attorney ASAP so you can get this stuff off of your mind and focus on business. Discuss your concerns openly, stay passionate, and protect your upside as much as your downside. Last, you must fully reconcile with the fact that it's likely you will lose your money. That's what the stats tell us. Stay resolved to have a good experience and to deliver on your vision and you will increase your odds of success.