equity, financing, partnership, financeFirst, some background…
I’ve got a new startup, with a product that’s about 1 month away from MVP. It’s a SaaS product and we’ve already got a couple pilot customers ready and waiting, who will paying setup and monthly fees. Having said that, I think it’s fair to say that the concept is tested and has a fairly high probability for success.
There are 3 total partners right now, and one of them is funding most everything. His risk is pretty low in doing this because he also owns a company that will be a customer. Worst case scenario, he paid for a sweet product that his company can use - not much different than outsourcing the project and keeping it to himself.
We’re considering bringing on a 4th partner who will help develop another area of the business and also help with sales and identifying product features. The 3 existing partners would kick in equal amounts of equity to bring him on. There would be no salary for this new partner until we start to make money, which he’s fine with due to a nice nest egg.
Now the question… Is it fair to ask for a capital contribution as well? If so, how much? I have no idea what the company is worth right now, but about $100K has been spent so far. The person funding the project now is doing so as debt, so eventually he will get paid back. If we ask for a contribution, should that also be debt or would it be fair to expect that to go straight to the business?
This is new territory for me and I appreciate any help.
I see three questions:
Is it fair to ask for capital contribution - That would depend on whether you need the capital and whether he can afford it. If the debt financing partner is happy to continue funding then there is no need to bring in additional capital. It would also keep the books cleaner and there would be less debtors.
If so how much? That would depend on your short term capital requirements. If you need funding to ramp up your sales and marketing activities then create a budget and determine how much of that budget can be funded by your current capital and if there is a deficit, how much of the deficit your existing partner is willing to finance. If there is a gap after that, then that is your additional funding requirement that you can potentially ask from this new partner.
Should the new funding be debt or for equity? - His contribution can be as a debt, equity or as gift. If it is debt he gets paid back, if it is equity then he buys shares in the company and he owns a proportional percent of the company (if company is valued at 1m and he paid 100k then he owns 10% and a claim to future profits and if company goes under, a claim to the assets). If it is a gift then he gets love, goodwill, and maybe the best parking space in the lot. Going for equity would involve getting the company valued and assessing the ownership stake of each of the partners and then determining the dilution of existing shares as the new shares are issued.
If you have been getting your ownership stake for contributing elbow grease(2 partners) or loans (1 partner), then he would find it fair to expect the same: free shares for effort or for a loan. If you don’t need an additional funding sources then you either give him shares for effort or create a new precedent stating that since you don’t need further funding and since the other 2 partners have already done 90% of the work, new partners are now required to buy in. The problem is that the new partner can see the exception and walk away or he may not be able to afford the buy in. So it breaks down to how badly you want him and whether he is able to afford the buy in. If he is willing and able, then it is all good.
All content is licensed under CC BY-SA 3.0.