Equity splits between partners

by an intermediary from University of Georgia

7 months ago

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!

1 like
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3 comments

searcher from INSEAD

interesting

6 months ago | like reply | 0 likes

professional from University of Michigan - Ann Arbor

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 --@----.com

7 months ago | like reply | 0 likes

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