investment, business-capital, cashflow, earnings, buisness-modelI’m starting a small software company with a couple of friends, and have been struggling to build a business model, since I have very little experience with business. My thought is that we will split the earnings between the three of us as it comes in.
The question is, how much should we split, and how much should we reserve for expansion of the company. To be clear its a cloud based business, meaning that the more space / processing power we have, the more potential we have to make more money.
My initial thought was to do it 50-50? where 50% of the profit is split between the three of us, and 50% is for investing? or should we take all, and allow the purchase of more shares in the company? (I don’t think thats a good idea, as it could lead to arguments between the three of us) Or is there some other method of determining what to invest and what to keep?
The answer to that question will depend on a number of things like your actual revenues, your personal needs (For example do you have the ability to go without pay? or do you need this to put food on your table?), and your drive and appetite for growth.
As a general rule, the less money you pull out of the business, the better if you’re looking to grow the business to it’s full potential.
What if instead of pulling out 50% of the profit, you left 100% of it in the business. Can you think of ways to use that extra cash to grow the business? You already mentioned more/better servers. What if instead of paying yourself you outsourced some work or hired an employee so you can get MORE done, work on more of your own apps and software development or seek out more clients for custom projects.
In almost every scenario, the business will grow fastest if 100% of the profit is kept in circulation and dedicated to growth. Unfortunately, in many circumstances, that isn’t possible to do 100%.
So the real question is, what’s more important to you: Growing the business quickly so the profits are bigger down the road, or having a cut of the profits now even if it might slow down the potential growth of the business?
Since it sounds like the business doesn’t actually exist (at least formally) yet, I’m going to assume (read: hope) you all have “real” jobs currently and are doing this on the side.
IF getting paid now is not critical to your survival, you might consider a different route. Just split the ownership of the company, that’s where the real long term value is, and that should also help motivate everyone to keep working toward building into the company. Every bit of time put into a project is building into that investment.
There are more than 1 answers. It depends on you all. What is your priority? You have advantages that you are not working alone. In this case, for your pockets, one can earn from somewhere else working part time, and meanwhile other partner managing the business. Same vice versa. This is to be continued until business is self sustaining. When I started my first company, I was working part time for my personal expenses, and all business revenues were reinvested into business, in order to make it mature and self sustaining.
OR
You have one partner who can fulfill your business finance, including your salaries. These both the answers have pros and cons. But first one preferable. Best judgement you can take for yourself.
LOL. I don’t think you will have a choice initially. Keep it simple. Follow the business demands. Since you’re doing a start-up and don’t have much business experience I would suggest using the Lean Start-up method to guide you. http://theleanstartup.com/
To build a business model in 20 minutes build a Lean Canvas: https://www.youtube.com/watch?v=7o8uYdUaFR4
Don’t start counting profits until you actually have them in your hand.
very complex and loaded question, but it sounds like you haven’t gone through the initial business docs and planning exercises (ie: proforma, financial model, equity splits, etc).
foundrs.com and Slicing Pie are good for equity splits https://foundersuite.com/
your questions will be answered once you go through the exercises
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