I need your opinion(everybody)

[BlogPro]

Uh, that's literally what equity entitles you to. A share of company profits.

Giving him equity in your business is insane. Pay him a referral fee commission for this individual client he brought you. Alternatively, if he's still keen on working with you into the future and you'd like to reward him with some of the business, develop a stock option plan with a vesting schedule to encourage this, contingent on continued employment by your company.

Equity Share & Profit Share are two different things. An equity does not necessitate a share of profits, UNLESS dividends are paid out.

 

[JFoulds]

Equity Share & Profit Share are two different things. An equity does not necessitate a share of profits, UNLESS dividends are paid out.

Equity very precisely necessitates a share of company profits, otherwise it's not profit, it's reinvestment.

Depending on the company domicile, it's almost invariably better to issue company profits as a dividend to shareholders rather than issue a bonus to directors since the latter are subject to payroll taxes and income taxes on behalf of the individual. This is especially true in the case of S-Corps and other pass-through tax entities, where dividends will almost invariably be the preferred form of renumeration for shareholders.

Issuing a bonus to an employee is tax deductible as operating costs (although it will then be subject to payroll taxes and personal income tax).

Company profits on the other hand are distributed via dividends which must be paid along shareholder lines. Having a 30% equity stake in a business necessitates a 30% share of any dividend renumeration, which is how profit is distributed to shareholders.

 

[siscooo]

Read above guy said creating barrier between business and friendship. If so that opportunity would not come at you in the first place.
Now the way I see it, your friend seems smart. He made a big thing for you, remember he could negotiate it but he went along with a simple "wish" which can or can not happen. My point is, he doesn't seem dumb enough to get a lifetime payroll for chilling so either you not explaining it right or you don't value his part.

I agree with you at your first point, if the relationship wasn't, this opportunity would not come, but in the other hand he is completely out of this field and also he doesn't have anyone else except me who could do this.
He actually wants to be part of company which is completely out of his field.They way he sees is that he wants to do a small investment in terms of moneys, but afterwards he is completely out in terms of contributing because
as i mentioned above, this is not his field and he probably will be a sleepy partner for the rest of the company lifetime. This concerns me and i do not want to have this kind of partnership.

 

[Stavro]

They way he sees is that he wants to do a small investment in terms of moneys, but afterwards he is completely out in terms of contributing because as i mentioned above, this is not his field and he probably will be a sleepy partner for the rest of the company lifetime.

If he still thinks that such an investment is feasible, you need to have a serious discussion with him about the real costs of doing business. Your time isn't free, nor is your PC/phone/car/office/etc, so your own investment is going to be substantially higher than the cash purchases you've made.

If you value your time at $50/hr (at the extreme low end), and you've been working on the company for 12 months (make sure you include time spent developing the idea, and previous projects testing out the methods), that's an investment of $100k right there. Even ignoring all the other costs, that's an investment in the tens of thousands for a 30% share.

Keep in mind too that he has not personally brought anything of value to the company, so he is owed nothing. A referral fee may be a suitable show of your appreciation, but I'm certain that someone else within your professional network would have brought you just as valuable leads sooner or later. His recommendation wasn't the make-or-break point for your company, it was just an early boost.

 

[m4rkituss]

Yes, I think it is fair.

Without the opportunity, there's no work. Without the work, you cannot fulfill the opportunity.
You both are needed on the situation, however, responsibilities are not distributed equally IMO.

 

[Writerly]

If he can not contribute anything else aside from that first client, I think 30% is a lot. Especially given that you'll be doing all the heavy lifting. I would go with a referral fee, as others have suggested. Also, keep in mind that business and friendship often don't mix well. Be very clear when you draw that line. If you're not comfortable with the kind of partnership your friend is suggesting, don't go into it.

 

[siscooo]

Yes, I think it is fair.

Without the opportunity, there's no work. Without the work, you cannot fulfill the opportunity.
You both are needed on the situation, however, responsibilities are not distributed equally IMO.

What would be your 'go' in this situation?

 

[m4rkituss]

What would be your 'go' in this situation?

Either could be a referral fee 5-15% (really depends on your profit margin) or letting him being part of the company as a business developer role with 1-5% company shares.
Do you know him? Ask him how is he going to get more clients.

In case you think that he is going to work for the company long term and bring in more clients then you can give him some company shares. But you must be sure that he is not going to hit & run once he gets the shares.

Best,

 

[siscooo]

I decided to go with 20% of profit which comes from that Client(so if in the future any new client comes he will not be involved), this 20% right now is actually the 20% general profit of Company(because i don't have another client rightnow).
But he was totally mad with this offer and didn't accept. I'm feeling now like i was wrong and didn't value him right, i don't know im really confused right now ?

edit: He wanted to invest money and have 40% of company without adding a contribute in future in the company and not adding any value at all(because this is not his field)...

 

[Stavro]

But he was totally mad with this offer and didn't accept. I'm feeling now like i was wrong and didn't value him right, i don't know im reall confused right now ?

What value did he bring to your company? Did he do any negotiation? Any pre-selling? Any contracted work? Or did he just bring you a name and telephone number so you would do all these?

People like him are leeches, they see someone with money and they try to get a piece of it. It's no different than the 'long lost cousins' that pop up around lottery winners. As your business grows, you will have more and more friends and 'family members' come out of the woodwork hoping for a handout. If you can't even handle saying no to one person, you'll end up bankrupt before the end of the year.

What you offered is more than fair for a one-time referral. If he cannot accept that, then he probably wasn't a true friend in the first place.

edit: He wanted to invest money and have 40% of company without adding a contribute in future in the company and not adding any value at all(because this is not his field)...

How much was he offering for this 40% share? If it wasn't in the upper tens of thousands, he's insane, and it would be best to cut ties now before he sinks your business entirely.

 

[siscooo]

What value did he bring to your company? Did he do any negotiation? Any pre-selling? Any contracted work? Or did he just bring you a name and telephone number so you would do all these?

People like him are leeches, they see someone with money and they try to get a piece of it. It's no different than the 'long lost cousins' that pop up around lottery winners. As your business grows, you will have more and more friends and 'family members' come out of the woodwork hoping for a handout. If you can't even handle saying no to one person, you'll end up bankrupt before the end of the year.

What you offered is more than fair for a one-time referral. If he cannot accept that, then he probably wasn't a true friend in the first place.

Yeah i also feel that what i have offered to him was fair enough.And somehow i feel like he really just wanted to have money without working at all.

How much was he offering for this 40% share? If it wasn't in the upper tens of thousands, he's insane, and it would be best to cut ties now before he sinks your business entirely.

Let's say for example if the starting investment to make all this business possible is 10k(he would be investing the 4k part to get 40%)..BUT i didn't really need his investment part to make it happen..

 

[Stavro]

Let's say for example if the starting investment to make all this business possible is 10k(he would be investing the 4k part to get 40%)..BUT i didn't really need his investment part to make it happen..

You don't work for free, your time is an investment as well, as is your internet bill, electricity, travel, etc. You may not be paying out-of-pocket, but these expenses should certainly be taken into account when valuing your company.

 

[siscooo]

You don't work for free, your time is an investment as well, as is your internet bill, electricity, travel, etc. You may not be paying out-of-pocket, but these expenses should certainly be taken into account when valuing your company.

Yes, that was the biggest concern for me, because i thought it's not fair to give the 40% of company to someone just because he introduced me to the client and wants to a make an investment at beginning and then be sleepy
for the rest of company lifetime...

What would be your "go" in this case?(now you know mine was giving 20% to him), but i would really like to know if you were in the same situation, how would you go for it

 

[Stavro]

What would be your "go" in this case?(now you know mine was giving 20% to him), but i would really like to know if you were in the same situation, how you woud go for it

For someone with this attitude? I wouldn't, at any price.

I made that mistake on my first business venture, my uncle decided that since he gave me one paid lead (I already had a half dozen clients), he should be half owner, and the rest of the family pressured me into accepting the deal. Long story short, he renegotiated stupidly cheap deals with my formerly-profitable clients, paid himself half of what the previous contracts were bringing in, and left me to pay the expenses.

When I bring on investors today, I ask for either a major portion of the work to be done (with penalties for non-compliance), or for silent partners on a brand new business I don't accept anything less than operating costs for ~2 years (including wages) in exchange for a 49% share, in addition to a strict non-interference contract.

 

[perrymason]

to me a 10%-20% sounds more than fair, a single idea/client doesn't make a whole company