This morning I got an email from somebody on bplans.com, asking my advice about a startup, and since it’s something that comes up a lot, I decided to answer it here. I’m omitting some of the details, of course, because it was email, not intended to be published:
I am starting a company. My investor is willing to pay $XXXX towards the start up .. he suggested a 30-40% share in the company. I do need his help but not necessarily his money .. I am not the business savvy type so having his business intellect would be a great help.
- It’s very dangerous to throw money and ownership and help all into the same pot and mix them up together at random. That’s what your email seems to imply. Separate the money contribution from the “business intellect” contribution.
- Deal with the money first. Never give long-term ownership in your company in exchange for short-term money. The $XXXX amount you include in your email is way too low to buy ownership in a company. Giving up 40 percent of your company for that is like offering to marry somebody to get out of the expense of buying dinner. You could borrow that off of a credit card and pay it in simple monthly installments. Or, better yet, borrow it from this would-be partner and give him ownership only if you don’t pay it back.
- Regarding the ownership value of his “business intellect,” clarify that before you go an inch further. Put into writing what you expect him to do for this company and how long you expect him to do it. Include what you expect to do and how long you expect to do it. And make sure the division of ownership seems fair. Sharing ownership is supposed to be a long-term and forever relationship. If he’s going to help you for a while by sharing what he knows, pay him in money, not ownership. You’ll both be better off.
Important summary: never give away long-term ownership in your company for short-term money or expertise. That’s the worst possible way to save money.