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Old 5th January 2005, 09:03 PM   #1
2AM
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Join Date: Jan 2005
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Default A question about startup capital...

Hi, I'm starting a new venture with some partners and we are trying to figure out how to quantify the equity splits on our seed capital, and since we're all a little green, I would love some good solid advice. Forgive me if I use some of the wrong terms, I'm still learning.

Here goes... Myself and my two partners have started a new venture with a 33 1/3 split each. We have an initial need for say $120k. We will finance this ourselves. In a few months we will be going out for actual funding, probably somewhere in the neghberhood of $1.2 million/year for 3-5 years. We are in a position that one of us can invest the initial $120k money and we're trying to decide how best to make this work being fair to all of us and smart about the investment at the same time.

Obviously, the easiest and cleanest way would be for us to all come up with the $40k each, not ever changing the equity. And that may or may not happen.

The scenario's that we are looking at are something along the lines of...

(A) 1 partner investing the initial capital contribution and taking an additional 15 2/3 percentage of the company. Making the splits to 25.5, 25.5, 49

(B) Treating the partner as an outside investor with a Pro-Rata reduction across the company, with the splits being 28, 28, 44.

Now the thing is, we want to consider a ratchet with a coupon, so the investing partner makes his money back plus a percentage, and over time as he is paid back, the percentage dilutes itself back towards equal equity. We just don't know how to define this, or if this is even right/fair.

Also, we are curious as to how seeking additional investment dilutes the split, etc. I'm sure this is a seriously deep conversation, but some basic feedback and ideas would be great.

Thanks in advance.

MT

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Old 9th February 2005, 04:04 PM   #2
akurmang
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Join Date: Feb 2005
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Default

Whichever way you decide once you go out to get financing all of the partners who own 20% or more will have to personally guarantee the loan. It will be very beneficial if that would be a person with strong personal financial statement (high net worth) and high credit history.

Asya

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Old 9th February 2005, 07:23 PM   #3
Poolman
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Join Date: Jan 2005
Location: Coram, NY
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Quote:
Originally Posted by 2AM
Hi, I'm starting a new venture with some partners and we are trying to figure out how to quantify the equity splits on our seed capital, and since we're all a little green, I would love some good solid advice. Forgive me if I use some of the wrong terms, I'm still learning.

Here goes... Myself and my two partners have started a new venture with a 33 1/3 split each. We have an initial need for say $120k. We will finance this ourselves. In a few months we will be going out for actual funding, probably somewhere in the neghberhood of $1.2 million/year for 3-5 years. We are in a position that one of us can invest the initial $120k money and we're trying to decide how best to make this work being fair to all of us and smart about the investment at the same time.

Obviously, the easiest and cleanest way would be for us to all come up with the $40k each, not ever changing the equity. And that may or may not happen.

The scenario's that we are looking at are something along the lines of...

(A) 1 partner investing the initial capital contribution and taking an additional 15 2/3 percentage of the company. Making the splits to 25.5, 25.5, 49

(B) Treating the partner as an outside investor with a Pro-Rata reduction across the company, with the splits being 28, 28, 44.

Now the thing is, we want to consider a ratchet with a coupon, so the investing partner makes his money back plus a percentage, and over time as he is paid back, the percentage dilutes itself back towards equal equity. We just don't know how to define this, or if this is even right/fair.

Also, we are curious as to how seeking additional investment dilutes the split, etc. I'm sure this is a seriously deep conversation, but some basic feedback and ideas would be great.

Thanks in advance.

MT
dude, you lost me at "Hi"

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