How much equity should investors get?
Hi there, I'm seeking counsel for a startup/small business with two initial investors. These investors have established auto repair businesses and will use those businesses as leverage to support a $500k loan that will be used to initially fund the business. Revenues from those businesses will be used to pay the loan until the business can pay for them. I will be providing all sweat equity. The investors above will have no involvement in the day-to-day (as they run their own businesses). One investor may provide connections to potential clients and if necessary, an additional investor.
2 Attorney answers
The answer as to how much equity to give an investor depends upon a variety of factors. One way to look at the situation is to try to place a value on your business. Once you have determined an appropriate value for your business, then determine how much money an investor is providing the business. From here you could figure out the percentage of equity based upon the investment and value of the business.
Amy Sue L.
This is really a business question, as much as it is a legal question - although lawyers can certainly help you structure and document it once answered. That said, I think you're likely to find a spectrum of answers - on one end of the spectrum, there are 3 investors with equal shares (each having 1/3 of the equity - 2 of which receive their percentage in consideration for $ investments, while you receive yours for your efforts in running the business day-to-day- in this scenario, everyone and everything they bring to the table is equally valued); on the other end of the spectrum, there are 2 investors with equal or otherwise proportionate shares (each having 1/2 of the equity - or some other percentages that total to 100% - in consideration for their respective $ investments, which may differ depending on the value of the businesses underlying the loans), and you are considered an employee of the business (not an investor), who will receive compensation for running the business- presumably a salary and possibly including incentives based on the success of the business; and of course, there are some variations that could impact any or all parties in the middle of the spectrum. I suggest that you have a conversation with your potential partners to learn how each party views the value being brought to the enterprise by the others and begin the negotiation from there. Note also that this deal sounds simple in theory but may become a little complicated due to the funding mechanism being used on the back end.