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Who pays the expenses in Money/Sweat Equity partnership

I’m starting a business with a friend, I’ll be responsible for all the work, and he’s only funding the business.

My question is, who pays the company expenses? Is it split 50/50 between us or is it all on him?

The profits are shared 50/50.

Answer 8238

It depends on your agreement. If the company is making money or the investing partner has contributed cash, it should be used to pay for expenses before asking for additional cash.

That definitely needs to be a question answered in your agreement, though.

Answer 8241

Whatever you decide, do it in advance and make sure it is clear. A great book I would recommend on the subject is called Slicing Pie - http://slicingpie.com/about-mike/

Regarding equity, the take home message is that rather than deciding on who gets what amount of equity before starting a business, it should be done during the growth of the business as that allows you to adjust things in real-time keep it as fair as possible. It feels ‘obvious’ after you consider the concept but it still opened up my thinking.

Regarding expenses and money/sweat equity, his model (summarised) is:

  1. Cash is king - so if you contribute cash (vs time/sth else) - the cash has a ‘multiplier effect’ on how many ‘equity points’ you get (he recommends 4x)
  2. Determine an hourly contribution rate for each person. So if partner x puts in 20 hours and partner y puts in 10 hours, they both get the appropriate amount of ‘equity points’.

Good luck!

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