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Partnership ke Side Effects ?

Hi Rodinhooders,

Me and my friend are planning on a food startup together, The question we got stuck on is…who should hold what in the startup ? (I`m not sure If we should even think about this before starting up)…However, As per my friend, because she is the one investing on it, she will own the venture solely (Sole properitorship) and I`ll get 50%, if we get profits.

I think, ownership should be shared and profits should also be shared equally (Partnership Model) though she is investing, the majority of workarounds will be done by me. In this case because she is the one who is doing the initial investing, she can own 60% of the ownership and 50% of profits and me, 40% of the ownership and 50% of profits.

Can anyone please help me understand how do I go about taking an important decision that`d help us in being clear and avoid any confusions in the future (PS: my friend is an elderly person with much more experience than me and has good understanding of various businesses)

Your opinions and suggestions are highly appreciated and thanks in advance

This would be of great help, Rodinhooders

Cheers

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36 Comments

  1. Hi Saif

    Co founding , Partnership decision should be taken very carefully. Both partners should have almost equal. You don’t want to make a good product and then break away due to differences. 

    1. Try understand how important your role is. If you play any key role, and if your partner can get any one else if its not you. 

    2. You can ask for a salary ofcourse in the above scenario as , your partner seems to be high on funds and you need some money to survive. 

    3. We recently formed an agreement , were we are giving salary to our partner, funds are invested by us,  and he gets equal partnership. This is because (a) the customers are his and in the business we are in customers are the most critical part (b)  we don’t know how the industry works in that domain, he is the person with all the knowledge. 

    Thus there is no right answer, but just make sure both of you are happy with your share, other wise it will not work for long. 

  2. Hi Saif,

    I have sent you connection request as I don’t want to put the information on partnership here. Call me on 7738389300 and I will explain you as why you should have a majority stake and not the other person.

    Dr. Dang

  3. oh?! top secret information dr dang??!!

    why deprive the rest of us 6818 from learning something from you??

    🙂

  4. Hi Asha,

    In that case let me explain my thought here.

    @Saif: Irrespective of whose idea it might be, when it comes to entrepreneurship, it boils down to who is working hard towards converting the idea into life time commitment and making money out of it. Now suppose you work day-night long and get things stabilized, you will still be in minority stake and the other person can throw you out anytime even knowing the fact that the venture will be your baby and not her’s per se. It will be the result of your sweat and hard work, not anybody else’s. And one day you will realize that just with initial some money given, the other person will have lifetime benefit, that to be without working and as a sleeping partner with full rights to kick you off anytime. That time you will land up nowhere because you will be too much attached to the brand that you will create by yourself. which itself will make it too difficult for you leave the company. On the other hand, being emotionally connected to the brand, you might comply with her suggestions in monetary aspect in the near future.

    In any case, if you really want to take risk and the idea is yours, I would suggest you to take loan and give a final shot to your dream. Entrepreneurship is about fighting solo as one day all sleeping partners become a liability and it hurts when you work your ass off and the other person takes so much money out of your company, which might be sufficient enough to employ/hire good quality people who will take your company to next level.

    Also, I can very well relate to the senior element coming here which will certainly make things difficult for you due to communication issues.

    All said and done, my only recommendation for you would be to go solo absolutely and work for yourself and your company.

  5. thank you :)))

  6. Hi Ankit,

    Thank you for your reply.but taking a salary would mean that my equity in the company would be zero (with 50% profits, if we make it)? Thats what she(my partner) suggests. What would you suggest Ankit ji.

  7. Hi Amit Dang, 

    Appreciate your inputs,I was only thinking I`d cross that bridge when it comes, Now im not sure if I should take that route. Thanks a lot Amit, what you said makes sense. Appreciate it a lot.

  8. Also,  please note that the way you have described your case, you won’t even be an owner of a start up. Instead, you will be working for a start up. 

    If you don’t have any other option but partnership, keep it LLP or Pvt. Ltd. like structure and not sole proprietorship with you have majority stakes. You should be the decision maker. 

    I wish I could convince you that chuck off partnership, if it is only about initial investment and the other person has no role to play once the money is given to you. 

  9. Need to Ask the 6 W (Why, Who, What, Where, When, Which) and 1 H (How)
    Questions on every answer received, for each in return everytime to Get the
    Best reasoning!!  They are your best Friends, if you have the answers to these, You can Make your Decisions easily!!

    Proprietor could never be a “Together” concern to start with since thats SOLE ownership, Partnership is the next best type to go for, with other possibilities of the LLP, Pvt Ltd, or go with Public Ltd as per your requirement in Time too!!

    Make Winning a Habit the rest would follow Suite.

    Use Logical sense with the Brain, also Use the Second Brain “Gut feeling” as Illogical sense, for the times Logic does not work too!!
    Keep the Focus on Learning, with Helping and Sharing making the Contributions.
    That would give the Logic to decide what works for you, when you Make The Choice Intuitively!!

    Have pm’ed you the Links to read on the weekend and come back with some Answers and decisions to take it forward once done!! Good Luck!!

    Cheers!

  10. Hi Saif,

    I assume it’s a Startup when you say it’s a startup. So, what do you mean by 60% ownership & 50% profit sharing….?
    Ownership of What?
    Ownership of investment? – Sorry, it will be used up
    Ownership of the place? – I guess it would be a rented one
    Ownership of Debts? – Its better if someone wants to own it 100% from you
    Ownership of customer? – You just can’t own them
    Ownership of decision-making power? – Let the most suitable person own it.

    You have asked a question assuming profits only, I think its a better deal to get 50% profit while investor is 100% owner because it only means that investor owns 100% loss if any but only 50% of profit if any.

    In a food business, for first few months you will have to keep pumping money. So you can’t be done with just one time investment and decide sharing on that basis. A lot depend on the gestation period.

    Following is my suggestion:
    1) Assume break-even period, lets say 12 months
    2) Suppose initial investment of your investor is 1,20,000, it comes down to 10k/month
    3) Once you startup and then suppose your investor has to pump in additional 10k per month to keep the show running. Then the total investment of your investor supposed to be 20k/month
    4) Now, calculate what is your market value, for example if you were working somewhere and earning 20k/month
    Then assume 20k/month as your investment in the startup.

    Assuming that your investor is only putting in money and not the sweat, in the above scenarios the sharing ratio can be 50-50.

    So, once your startup is running, after first few months you guys would be in a better position to decide who owns what and how much?

    However, this is just one rationale behind sharing ratio but it is not a standard procedure.

    You can use various permutation and combination taking various factors into account.

    Regards,

    Aman A Jha

    9892621090

  11. Here is a Formula you can Look up by Alok to help you decide as part answer to your question to calculate Sweat and Cash proportions!!

    https://therodinhoods.com/xn/detail/6328457:Comment:161177

  12. Saw this really great post that might be very useful to you: https://thenextweb.com/entrepreneur/2013/11/20/calculate-equity-split-co-founders-startup/

    I like Alok’s note as posted by Darshan, and think that this builds on it.

  13. I don’t a sleeping partner is worth having. It won’t help in any of the advantages of having a co-founder like sharing responsibilities, being their for you in ups and downs and bringing in the same energy to the venture.

    1. For money, find a investor for seed money or take a loan.

    2. For seniority and experience reason, find a mentor and not a sleeping partner. There are plenty of good people around who would love to help for free or agree to come on board as a advisor for a single digit equity.

  14. I absolutely agree and second to what you said mr robin…

  15. Thanks Amit 🙂

    Wish you all the Best Saif for this venture.

  16. Dear Saif,

    Apologize for the long post in order to explain this more practically so you can take a decision.

    A partnership is usually based more on trust than any monetary value. However, in long term arrangements like a business; that is easier said than done, as the latter tends to take over the former.

    In order to ensure trust that your partnership will not break over a coffee conversation (not for you, but for others doing business with you) the registration of a partnership and its mandatory filings have been enforced by the govt. This arrangement comes with its own drawbacks of extra accounting and filing expenses along with the problem of unlimited liability – if one partner takes a loan all partners become liable to pay up even if their names were not on the loan papers initially!

    This has been partly solved by Partnership LLP but that would be digressing from the topic on hand. Your older and wiser female partner’s suggestion of going sole proprietorship may be good to start with if you have blind trust in her. This is usually done when the partner is your wife or mother. However, this may not always work with other relations, as there is also what we call “incentive to work” in economics.

    If you have no share then you will always crave to start up on your own. While you work with great excitement initially but reluctantly later on, in the non-partnership enterprise. To be fair to both parties entering a partnership consider risk and return.

    If your partner loses all the money she puts in, then you will not be able to pay back either(risk). The sole proprietorship will ensure that her risk is limited to the amount she invests. If you do well and the enterprise grows, then she gets a return for her investment and she is happy. However, since you are investing your time and effort, the risk is limited to your time and effort which only gains value along with the firm’s value. Hence your risk is already limited. Your return in terms of 50% of profits is based on trust but is still a fair return. This deal seems unfair to you because you do not see any long term return of ownership or capital gain.

    To solve this, your agreement with your partner should be beyond trust. A salary will ensure that your 50% salary is assured; however it does not ensure capital gain. Hence your partner must give you an opportunity to buy the company share from her in smaller installments. For instance if you re-invest 25% of your salary back into the company as a deposit in the sole proprietary concern your partner must return the deposit with some interest as she is the sole proprietor. Once you equal your share or until it reaches a %age that you are happy to share along; you can close the sole proprietary and form a Partnership LLP or a Pvt Ltd. setup. Therefore your partner would have limited risk and gain confidence as your deposits flow in and your company grows. You would earn 25% as salary which would take care of your expenses and can exactly calculate your ownership based on your deposits. Time value of money can be accounted for in terms of interest on the deposit allowing you to enter an agreement where you pay 50% of the investment value a of today(day of entering the partnership).

    Trust this helps.

  17. Wonderful Pawan, couldn’t have said it Better myself!!!

    Saif Do you get it now, to what I had Shared with you on similar lines ? 

    Do share your learnings and what you make out of all the suggestions made hereunder, and the various other posts so marked to help you with as well too, for the Query you posted originally !!

  18. Saif – this is a quora post that I was asked to answer. Similar to your question!

    How do I split equity between my new co-founder and I on a side-project I have been working on for over two years, put money in, and brought initial users for?

    It’s a side project I started three years ago. Over the years I’ve probably put in a few hundred hours working on the code/product, design, and marketing, spent $5-6K on costs, and brought in a few thousand initial users. All of this has been in my spare time (still is) and arguably, while the project is still alive and doing ok, it hasn’t been a success by any measure. Time constraints and single founder exhaustion are prime reasons, imho. We, and literally everyone we talk to, however, sees it’s potential.

    A very good friend of mine is now joining as a “co-founder” for this new phase of the project and we are both highly driven by our plans for the future. Beginning mid-last year, we decided to split any costs going forward and he is contributing about the same time as I am at this point (part-time).

    Neither of us are in a position to leave our jobs due to immigration issues. We are however, investing more money in it, getting external help, and forming a company now.

    He agrees that I should get additional equity for all the work and money I’ve put into it so far. Being a good friend though, I want to make sure we do this right. The money I put in is not an issue. It’s the hours and sticking it out for this long on my own. How would you figure this out? What’s reasonable?

    Alok’s reply:

    thanks for the interesting question.

    Let me dive directly into the sweet problem:

    – Lets assume that you have invested 400 hours into the project

    – Lets assume that your market value is US$ 25 per hour

    – You state that you have invested 5000 US$ into the project

    Therefore the ‘capital’ invested into the venture by you is = (400*25) + 5000 = US$ 15,000

    – Now lets assume that your friend puts in 500 hours in the next few months

    – His value in the market is US$ 30 per hour

    After he has put in his hours, the ‘capital’ invested by him will be US$ 15,000

    Total Capital of the Company now will = US$ 30,000

    Both of you will therefore own 50% each.

    – Lets assume that you also continue to contribute while he is involved

    – Lets assume that you add another 200 hours

    Your capital invested in round 2 will be = US$ 5000

    Total Capital created will be 15K + 15K + 5K = 35K

    Your share will be 20/35 = 57.15%
    Your friends share will be 15/35 = 42.85

    This formula can be used to add capital to the pool and reward the contributors (be it via cash, effort, employees (the amount they DO NOT take home in cash) etc.

    Tell me if this helps!!

  19. The simplest and best answer I have read on this. Period

    Divide things up into these categories: manage the company; raise the money; had the idea; brings in the revenues; built the product (or performs the services). Divide up in equal portions.

  20. really interesting post, thanks… you’re right – it does add more dimension to what Alok has explained.

  21. Saif,

    After having been through some mess myself, and through some friends’ stories, one founder should always have majority. a 50-50 ownership causes issues when both of you have a direct conflict and no-resolution seems to be around.

    I’d suggest if the only thing from friend is bringing to the table is investment, find someone else. Investment is dead weight. I have been there and can’t request you you enough to steer clear of the i am the investing founder problem. You don’t want an investor at this stage. You need someone to go through everything with you. A startup is never about idea and investors. Agreed investors make it easy for you to float, but don’t make it your pain for tomorrow.

    If you’d like to talk, I am available at 9958839124.

  22. I so so agree with Amit….have gone through this phase….and yes the statement what has has made that “Investment is dead weight. I have been there and can’t request you you enough to steer clear of the i am the investing founder problem. You don’t want an investor at this stage. You need someone to go through everything with you.” is damn true.

  23. Though would still ask you to make it clear for others to Answer specifically as mentioned earlier too on October 11, 2013 at 3:22am and also if you respond accordingly after posting it too as well 🙂

  24. Hi Ankit, Thanks for your insights. I realize, what you say makes perfect sense.we both should be happy with what we agree upon…otherwise, Its not worth..Appreciate your suggestion.

  25. Hi Darshan…thats a great post with much to learn..:)

  26. Hi Aman..Ownership of equity is what I was hoping to look at … gestation period is something which we missed on focusing, Thanks for bringing it up. Once start up runs I think we`d definitely be in a better position 🙂 

  27. Certainly…Harsha. It indeed is. appreciate your suggestion 🙂 

  28. Hi Robin…Thats a great perspective too..Thanks for the heads up 😉

  29. Thank you Robin 🙂 

  30. Wooow !! Pawan, Im just amazed and awestruck at your suggestion and great solution. Simply superb Pawan..I cant thank you enough for your suggestion 🙂 

  31. Hi Alok, That really helped a lot..I think Im much more clearer now on how to go about doing this.

    Thank you much for giving your perspective on this. Infact, Thankyou for creating trdhs..

    I dont think I could have found a solution anywhere on the internet. trdhs rocks and the people who tryin help others with their inputs here are the rockstars 🙂 

  32. Thank you Rahul for your greatly clarifying inputs…Will certainly get in touch with you sometime. Appreciate it !

  33. Divide in equal portions(agreeable) 😉 Saurabh 🙂 

  34. Hi Rahul,

    True, Indeed. Sure, registrn is important. Appreciate your suggestion of pvt ltd.

  35. Hi Amit Kumar, Thank you very much. I`d certainly consider your valuable suggestion. Kind of you to offer a talk. Appreciate it 🙂 

  36. I can understand how rough it might have been. Thanks for making it a point to offer for me.

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