Equity splits between partners

June 10, 2024

by an intermediary from University of Georgia in New York, NY, USA

TLDR: Buying a $1m business with a partner, and I will operate the business full-time while taking a small salary (~$100k). He will help out, but it won't be an overly involved role by any means. The equity check (~$110k) is small enough for us to split it, but I am trying to figure out the equity split.

I know that in traditional searches, the LPs get a 2-3x step-up, but if he's not afraid of the personal guarantee, how much of the business should I give up? I am leaving a good job to run this biz, but his financials will help with approvals, etc.

Some things I'm mulling over: I) no preferred return for him if he wants a higher %, ii) Have him put in more cash, iii) just don't think TOO much about it,

Any insight is much appreciated!

Reply by a searcher
from Southern Methodist University in Dallas, TX, USA

Separate the concept of equity from operating compensation. How you split equity is a decision between the two of you as there are many different ways - if you are both taking a PG then I would suggest a 50/50 split. The compensation you receive is for operating the business (not due to being an equity partner) - if the business can afford it you should pay yourself a market rate. Then any distributions can be split via the equity structure with no influence from operating compensation.

Reply by a professional
from University of Michigan in Detroit, MI, USA

There are a number of ways to do this. First, avoid a pure 50/50 split. Ideally, one person has final say on all major company decisions. Second, as the sponsor (at least, that's how I understand your post), you should retain majority ownership. One possible structure would be: your partner puts in more of the equity up front, you receive a setup to retain majority ownership, but your partner receives a preferred return to offset risk. Assuming everything goes to plan, your partner will get his investment returned sooner, but you will enjoy more long-term upside because you are doing the work (I agree with Ken, your operator compensation is a different issue). Let me know if you want to discuss further. My firm regularly works with sponsors in this type of situation. You can reach me here or at redacted

+1 more reply.

Join the discussion