equity, business-model, investorsI want to learn more about business before I deal with my first Investor.
I am starting an IT company. I have some cool product ideas that I will develop as well as I have a Freelancer account that gets more projects in which we can work as a company. I have projects coming in from other places as well.
I want to know, if an investor puts money in the company. How does he get paid? How does I get paid? How does Equity work in my company? There is an other guy who is my friend who will be my partner as COO. How will we get paid? What will be the banking issues and financial statements?
As a CEO with majority of shares, what will be in my control?
I thought that as I may have 80% equity, I may get 80% of the profit but then I learned that its not that way, I get salary per month and equity is just the power/control over the company. I want to learn more.
I would like you to guide me with every aspect of business. I can read if you link an article as well.
This question could take a long time to answer because there are many variables and so many ways to structure a business depending on agreements and contracts.
“if an investor puts money in the company. How does he get paid?”
Usually an investor will invest because they can see profit. This means that you are expected to either grow to the point at which someone buys you. In which case they sell their shares for a large profit. Or you get so big you float on a stock market. In which case they trade their shares for a large profit. Or they can see you making huge profits, in which case you pay them via dividend (proportion of the profits relating to their shares). Perhaps a combination of all three.
“There is an other guy who is my friend who will be my partner as COO. How will we get paid?”
This is up to you. In most cases, like any business you would take a salary as an employee. In cases where the employees are also shareholders then you could be paid via a combination of salary and dividend although it is best to look into the tax laws of your country as this gets into loophole territory as dividends are usually taxed at a lower rate than income.
“What will be the banking issues and financial statements?”
I am not 100% sure what you mean by this. I’d advise getting an accountant. A good one is worth their weight in gold. Simple knowledge of the law goes a long way when it comes to finances.
“As a CEO with majority of shares, what will be in my control?”
This is up to you. Although, I don’t usually see CEOs as having most control but instead taking most of the blame. When things go wrong, it is usually the CEO that investors look to replace first. The CEO is generally who holds everyone accountable, the person who makes sure everything is getting done. Then, at board meetings they are held accountable. They give their reports and answer questions on the state of the business (Usually to the chair). If the business is not functioning correctly then they should know about it and they are responsible for fixing it. They would then delegate the responsibility outside of the board room.
However, in a small business of two people this is rarely the case. You just understand your roles and responsibilities, agree on who does what and get stuck in without the whole shares getting in the way. In a small business that is the route to madness and falling out.
“I thought that as I may have 80% equity, I may get 80% of the profit but then I learned that its not that way, I get salary per month and equity is just the power/control over the company. I want to learn more.”
if you have 80% of the shares then I believe you would be entitled to 80% of any of the dividend that is issued (depending on preference of shares and shareholder agreements - as I said, any manner of business can be set up with contracts). Power/Control over the company is decided by the company. Usually a board of directors would be set up to discuss reporting and hold the CEO accountable as mentioned. But the control of the business is not necessarily decided by shares. It is decided by contracts.
“I would like you to guide me with every aspect of business”
That is too broad for this. Best you stick to more specific questions. It is impossible to relate an entire business degree in a SE post.
As extra information and to manage your expectations - if you are looking to build a service business off the back of your freelance business it would be very rare to find an investor who would be willing to invest. Service businesses are not necessarily scaleable or heavily profitable enough for angel investors.
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