Two Plus Two Newer Archives  

Go Back   Two Plus Two Newer Archives > Other Topics > Business, Finance, and Investing

Reply
 
Thread Tools Display Modes
  #1  
Old 11-29-2007, 11:53 AM
gaming_mouse gaming_mouse is offline
Senior Member
 
Join Date: Oct 2004
Location: I call.
Posts: 5,584
Default How does equity work in a new company?

Say 3 people are beginning a new company. At inception it is simply an idea. Two partners, Resource1 and Resource2, are considered more valuable because of the skills they are bringing to the company and the work they will do in the future. A third partner, Money, will be putting up most of the money.

They decide that the following equity distribution in the shares of the new company will be as follows:

Money -- 20%
Resource1 -- 40%
Resource2 -- 40%

In addition, each partner also puts up money for the company's operating costs, as follows:

Money -- 100
Resource1 -- 50
Resource2 -- 50

My question is (and there may be more than 1 "standard" answer -- please let me know if that is the case), how much money each person would get in the following scenarios.

Scenario 1 After 6 months of operation, half the company funds have been used up, and all partners make a decision to dissolve the company and receive their fair shares of what is left. So what are those fair shares?

Scenario 2 After 6 months of operation, company profits = company losses, so the company has its initial 200 still intact. They decide to dissolve. What is each partner's fair share?

Scenario 3 After 6 months of operation, the company has profited 200, so the company has 400 in assets. They decide to dissolve. What is each partner's fair share?
Reply With Quote
  #2  
Old 11-29-2007, 12:02 PM
midas midas is offline
Senior Member
 
Join Date: Aug 2003
Posts: 719
Default Re: How does equity work in a new company?

There is no such thing "fair share" they all get their legally agreed upon equity distribution. That's why corporations are formed by lawyers to avoid this issue.
Reply With Quote
  #3  
Old 11-29-2007, 12:45 PM
mindflayer mindflayer is offline
Senior Member
 
Join Date: Feb 2005
Location: Vancouver
Posts: 541
Default Re: How does equity work in a new company?

$x gets you y%. X and Y are whatever deal he/she can strike.
You seem to be missing a whole lot of information.
What do resource 1,2 and money get paid for salary. What type of work is being done?!? How viable is the venture long term, does it repeat, is it (linearly) upgradable?
if $200 gets you $400 after 6 months, can you double that to $800 after 12 months?
How probable is each outcome?
Is there a 4th outcome? The business continues?

Without knowing much, I would guess it is probably Not a new business but a one off deal (since you consider closing after increasing to 400.
Reply With Quote
  #4  
Old 11-29-2007, 03:33 PM
APXG APXG is offline
Senior Member
 
Join Date: Dec 2006
Posts: 484
Default Re: How does equity work in a new company?

i'm not sure if this is commonly done, but i would issue warrant-style shares to the resource partners that would only vest at strike prices above an equity threshold, and also introduce a time component. for example:
contributions:
rp1 = $50
rp2= $50
mp= $100

shares:
rp1 = 80 --> 20 fully vested at time 0, 10 at time 1, 15 at time 2, 20 at time 3, etc. of the 10 at time 1, 2 would vest at strike / equity = $2.5 per share, 2 at $3 per share, etc.
rp2 = 80 --> same as rp1
mp = 40 --> all fully vested

you can obviously change all the numbers to drive how much the mp wants to pay the rp's for their work outside of equity creation, hence vesting 2 shares at $2.5 despite that being breakeven equity. if you want to pay them extra despite equity destruction, make some of the shares vest at $1.5 or $2 and scale this in for as time gets longer.

perhaps some of this is wrong / doesn't make sense, but i think its a start in the right direction in terms of framework.
Reply With Quote
  #5  
Old 11-29-2007, 04:24 PM
bobman0330 bobman0330 is offline
Senior Member
 
Join Date: Aug 2004
Location: Billion-dollar CIA Art
Posts: 5,061
Default Re: How does equity work in a new company?

For tax reasons and for fairness, you would usually set up the company so that, e.g., the money guy gets preferred stock worth $75 and pays $25 for 20 shares of common. The other two pay $50 each for 40 shares. If that was the structure, Scenario 1 gives all the money to MP, Scenario 2 returns what they put in, and Scenario 3 gives 140 to MP and 130 to the others. (Unless the shares have vesting requirements, which would also be common.)
Reply With Quote
  #6  
Old 11-29-2007, 08:02 PM
Quercus Quercus is offline
Senior Member
 
Join Date: Aug 2004
Location: Don\'t touch the hair.
Posts: 1,067
Default Re: How does equity work in a new company?

It gets sort of complicated, because typically these deals typically involve different classes of stock for the pre-money and post-money cases.

In the case you describe, if there is less money after 6 months than everyone put in, then typically the initial shares pre-money would get nothing and the post-money round 1 investors would get back proportionally what they put in.
Reply With Quote
  #7  
Old 12-01-2007, 05:23 AM
Preem Preem is offline
Member
 
Join Date: Jul 2006
Posts: 98
Default Re: How does equity work in a new company?

Here in Silicon Valley, the Money guy would get the most shares (>50%) and have the most voting power.
Reply With Quote
Reply

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

Forum Jump


All times are GMT -4. The time now is 04:47 AM.


Powered by vBulletin® Version 3.8.11
Copyright ©2000 - 2021, vBulletin Solutions Inc.