Startups Stack Exchange Archive

Shares in a partnership business

I am seeking for a advice on a issue raised due to allocating shares in a partnership business among 4 best friends.

The industry was clothing and capital is 400k.

I shall name the business partners as A,B,C,D

A is inputting 160k, and being a sleeping partner. (from London)
B is inputting 160K, and at UAE.
C is inputting 40K
D is inputting 40K

A has no roles and responsibilities. B will do the purchasing once in 3 months or once in 6 months or as the stock finishes. C and D will be conducting the daily operation and sales.

The shares that was allocated considering the money and effort was,
A - 20%
B - 40%
C - 20%
D - 20%

And it came in the following manner

Capital Share from 400K - A 40%, B 40%, C 10%, D 10% 

Effort Share - A - 0%, B - 40%, C 30%, D%30

so Capital + Effort share  = 40%, 80%, 40%, 40% out of 200

so out of 100 = 20,40,20,20. %

so the 2 problems that raised are,

1/ B is only doing purchasing once in 3 months or 6 months or as soon as stocks finish. C and D says Operation and Sales task are daily on going work and time consuming, so how can someone working in once in 3 months or 6 months have a greater effort share than Daily on going time consuming tasks. so they are demanding for more than purchasing or to reduce the purchasing share.

so isn’t it fare to go for a percentage of

Capital Share from 400K - A 40%, B 40%, C 10%, D 10% 

Effort Share - A - 0%, B - 20%, C 40%, D% 40

so final profit/loss share will be 20%, 30%, 25%, 25% ?

2/ having two separate shares for Ownership & Profit. 2 partners are saying to merge it and keep only Ownership share, the other 2 are saying only capital is counted for Ownership share so there should be both Ownership share and Profit/Loss Share

Please advice.

Answer 8173

Here is a tool you could use. The problem with it in this situation is it doesn't allow you to combine effort and capital into a single variable to use for allocation of ownership.

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I suggest you use the following process to arrive at an ownership allocation.

  1. Value the entire company in dollars.
  2. Authorize a specific number of shares available to be issued.
  3. Sell shares to investors on the basis of the total company valuation and the number of shares outstanding.
  4. Agree, moving forward, on the dollar value of each founder's effort. This can be on a per hour, per diem or per project basis.
  5. Pay owners contributing sweat equity in shares.
  6. Forget about trying to allocate ownership based on percentages. It's too confusing and impracticable. Use shares instead. Percentages are the result of the share allocation. They do not drive share allocation.

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