Need advice with ownership structure

[chrisw5977]

So a bit of context - I’m 29 and have an already established company that does a modest $40k / mo gross. It’s a single member owned online business and I’ve built it by myself, so I’m comfortable marketing/branding/designing and product development.

Here’s the thing - I want to start my next business, and it’s something I’m greatly passionate about, without question 10x more passionate than my first one. I built a business model around it and it’s very profitable. I then made a deck with everything from the brand to the financial model, go-to market, and business plan and shared it with a few of my closets (3) confidants. All three are financially more successful than me - one is an ex-investment banker with 20 years experience, the other head of acquisitions at a multi-billion dollar company, and a founder fresh off raising his Series B. I wanted feedback from them before I went out to raise capital.

2 of them gave me great feedback - the head of acquisitions and the other founder. They said this had legs and helped me strengthen the deck further. The ex-banker came back with his feedback and it was clear he hadn’t stopped thinking about it. He was very keen on hearing more.

So we sat down and it was apparent he wanted to be involved. At one point he even mentioned “I’d be happy to go 50/50 with you on this, I’d have to take a longer think about it before committing though.” He then proceeded to ask what my next steps were to which I responded, “I’m not sure, I think i’m going to raise some capital for this.” To which he said - “No private equity or venture capital will put money into this idea. It’s too early and it’s too small. You want a private investor.”

Fair, the idea is small, and I do need an MVP before getting VC or PE. And maybe that’s why I spoke to him first. He’s right again about the size - the idea is small. At least on a relative basis. It’s not the type of tech idea that will disrupt a billion dollar industry investors froth at the mouth over.

This business is built to be a low-headache and heavy cash flow business that can make 10s of millions over 10 years if executed right, not hundreds. And I’m fine with that. Truthfully, I’d rather build slow and small without the headache, but that’s just me.

Anyways, over the following weeks, he became more involved. I’m pretty sure I even said let’s do it together. And it’s been awesome.

He’s a good buddy of mine, even though he’s about 15 or 20 years older than me, and the time we’ve spent working on it together has been way more fun than the time I spent alone making my other business. He brings great ideas to the table, not all of which I agree with, but it’s nice to work alongside somebody equally as passionate.

I always said the next business I do, I want to be a co-founder. I think business just works better, and is more fun, with two.

And the model and idea became 10x stronger.

Now we’re meeting up regularly, working nonstop and touring potential places for our first MVP.

And this is where things get complicated.

We’re broaching the topic of equity. To build our first MVP, we need about $200k, maybe more. And I don’t have that type of cash available to me. The absolute max I could bring is (maybe) $40,000, and I’ve been transparent about that from the beginning so it’s no surprise. He knows he has to fund the Lion’s share. The sticky part is that he finds it’s difficult to justify an even split given the capital situation. And that’s after I’ve proposed he funds what I can’t but I don’t get paid until his initial investment is paid off.

I don’t necessarily disagree either, It’s a fair case from his POV. He’s risking more capital, and I recognize that. However I can’t help but feel slighted here. I’m the one that brought the idea to his attention, looped him in the business, and the one who has more hours to allocate to the business when it’s live and running. Even now I’m working on it more. I’m also the one who will be driving people through the door. What he’s bringing is a level of financial expertise, and the cash.

We need one another but anything less than an even 50/50 feels like a loss to me. Is that unreasonable?

It’s also noted between the two of us that I’ll be the two feet in, where as he’ll be one foot in, one foot out - And I’d prefer it that way. Let me run this because I want to, and I know what this baby needs.

So I’m just wondering what you guys thought -

1) Am I being unreasonable to expect anything less than 50/50?
2) Are there some creative ways we could structure the business?
3) Should I be willing to walk away if he’s not willing to meet me in the middle and try raising money elsewhere?

Thanks for reading.

 

[silencedogwood]

@chrisw5977 Congrats on building one business already!

This sounds like a bad deal. You're essentially doing a seed round for $400k valuation. If you've already got a track record, you'll have no problem raising an angel round and 3-4x this valuation.

 

[chrisw5977]

@silencedogwood Thanks!

Can you help me understand how current set up is 400k valuation?

 

[messierobject]

@chrisw5977 $200k for 50% = $400k valuation

For reference, many accelerators offer pre-sedd terms that are functionally $1.8M valuations.

Not apples to apples as you indicate that this concept is not venture back-able.

That said, you should be able to find HNWIs and angels that would give you that level of capital on better terms.

 

[chrisw5977]

@messierobject This^ super helpful. Any idea where I can look outside of friends or family?

 

[messierobject]

@chrisw5977 If in the U.S., check out your local SBDC (small business development center), EDC (economic development center), and chamber of commerce. Their goals are to help create economic impact on the local community. They can help connect you with resources.

 

[manasseh77]

@chrisw5977 I was multiple times in your position. Here are some thoughts:

1. There is no product without you.
2. Money shouldn't be attached to personal feelings.

That said, if your product needs investment, you can come up with an evaluation model. Say at the current level we value the company at xxx. My investment is the product and is valued at 600k. Your partner might bring 400k. You could come up with a 60/40 split.

Of course there are many other things to consider. But you can really boil it down to:

1. Do I need my partner(s)?
2. How much value does it bring?
3. Would your financial investment (40k) be better spent into growing the company and from that growth you might not need other investment?

Also, one of the most effective splits I've seen working is the earn-based one, i.e., you are willing to give 40% shares based on goals, e.g., 10% now, another 10 when xxx is done, etc. Like this your partner has to earn it and there is motivation. It's a win-win for both with a (somewhat) guarantee.

I hope this helped.

 

[rh27]

@chrisw5977 You could use that Harry Potter money, Mr Moody? Just making sure you aren't using your real name account. There is a lot going on here. First, you went down a hole without an agreement. How do you know this guy won't go off and build it himself? $40k gross monthly solo gig and you don't have $200k? That is some serious cogs. Maybe there is another way to raise funds? I'd also suggest thinking about how you can be creative with the MVP. Everything always takes longer and costs more than you want. Perhaps you can get there with more like $100k over 6-12 months? What about brand building and marketing? It takes more money than you would think to raise capital. Personally I think 50/50 is a great deal if you aren't putting up any cash. But I think it will take more money, plus future rounds, and equity for employees? You have to plan and structure a more complex deal.

 

[johmars]

@chrisw5977 The questin you havn't asked yourself is what does he bring to the table other than money? If he is taking 40% of the workloadn at putting 400k valuation, that is reasonable otherwise- the answer is there is better options out there

 

[ivan57]

@chrisw5977 So I’m just wondering what you guys thought-

1. Am I being unreasonable to expect anything less than 50/50?
   1. Definitely not. It should be a split much more in your favor. Have the difficult conversation with him and don't back down.
2. Are there some creative ways we could structure the business?
   1. There always is, and there are some good recommendations in this thread too.
3. Should I be willing to walk away if he’s not willing to meet me in the middle and try raising money elsewhere?
   1. Yes. If he disagrees now expect much more down the line, especially in a 50/50 partner.

TLDR: Stick to your guns and get what you want or regret it in the near future.

 

[managedsurrender]

@chrisw5977 50% for your partner seems like a bit much. My guess is he knows there’s no business without him and he’s using that fact as leverage to try to get the best deal possible. It’s a bit aggressive of him IMO but maybe it’s just habit at his age.

You have to be willing to walk away from him (or bluff) if you want to have power in the negotiations.

 

[nikkid]

@managedsurrender No it's not just a habit, I do think that OP's partner is a bit aggressive.

 

[bailey2017]

@chrisw5977 Hey man, congratulation first of all.

We could do one thing which would be fair where am seeing this situation.

Put your $40k and ask him for $40k for 35% of your business. And for the rest of the $120k take a loan from him, giving him a better percentage than the market. If he agrees to it, go for it if not actually get a loan from the market if you believe in the project. You will easily get a loan by looking at your past business.

Great day, Cheers

 

[zhand]

@chrisw5977 I agree with other posts here that are saying you brought the idea and will be doing the work (making the assumption that the other person is just bringing the money) and in my opinion just bringing the cash doesn't entitle him to an equal share in the business...

 

[rickytheevangelist]

@chrisw5977 This is the same hurdle I ran into in the past. If you don’t have a fancy background it’s a nightmare getting investors to give you the time of day and VC’s won’t touch you unless your a potential unicorn. Best of luck with your search.

 

[rickytheevangelist]

@chrisw5977 My opinion is don’t give him more than 20% and pool several angel investors together for the rest. You already are generating revenue, are you cash flow positive?