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I am currently employed by a business man who often invests in new companies. I came to him with an idea and he wants to move forward with it. He has zero knowledge in this industry but I have ample knowledge of the proposed industry.

I need to make an income and cannot afford to work without pay. Since I will be paid as an employee for this "new" company", I cannot claim this as one of my investments. Therefore, my investment is the idea and business plan alone. How much of an owner/shareholder does this make me (percentage)? Please throw out industry standard figures, if you know.

Also, he owns a corporation that he would like this to be a subsidary of. is this a problem? Should we be a partnership or can we be a subsidary of his corporation and I'm a shareholder?

(any help is much appreciated- I am quite green at this!)

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5 Answers

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Have you considered taking money from him as an angel investor? Maybe he gives you $50k to get started and takes 20% of the company. You use the $50k to live on and cover overhead for 6 months while you build the product and get initial customers.

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Thank you for your reply Ryan B. I have considered (briefly) using him and his contribution as an angel investor. As I said before, I am very new to this and am trying to weigh my options. That said, he is also making some contributions initially which are more than financal- he has a office space, desks, computers, etc that he will allow the new company to use free of charge. Perhaps I could figure out the worth of these contributions and count that as part of the financial investment should I go the route of calling him an angel investor. – user9236 Apr 7 '11 at 12:22
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Your boss, let's call him Mr. X, is holding all the cards in this situation.

I would like to tell you that the idea person gets 30% of the new entity and the money guy gets 70% but that's not how things work.

If I were Mr. X and I thought the new venture was plausible I would pay you a decent (market) salary and give you a nominal (1 to 10%) equity in the new entity. I would structure a profit sharing plan to make sure you were encouraged to reach break even early and keep your nose to the grindstone. I would also make sure you sign a non-compete.

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Hello Mike, thank you very much for your reply. – user9236 Apr 7 '11 at 12:25
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Founders are expected to make some sacrifices, but are not expected to live like paupers and not get paid a salary. Your getting paid a salary does not mean you somehow give up ownership of the idea.

As you develop your idea into an actual business, it will be worth more and more as it goes from idea to business losing money to business with customers to business making money. Your salary is a very small part of that enormous growth in value. And it's the shares in that growth in value that the two of you are dickering over.

I have no idea what you situation actually is, but I would try to find additional investors. The more investors you have, the more power you have as well to walk away, or equalize the power structure.

As it is described, you will be an employee of his new shiny business.

To the extent you can develop (and document your development) of your business and plan, outside of your paid time in your regular job and not using his paid for resources.

Read a bit about BATNA as well as the valuation of early stage companies.

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Thank you so much for your reply, you gave me food for thought and a lot of useful information. – user9236 Apr 7 '11 at 13:38
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There are several aspects to this. You're getting paid a market salary as an employee, but you'll be working as an founder/owner. There's a big difference between the two. The second one spends a lot more time on the job and worries about how it's doing even when not actively working.

If I was in the shoes of your businessman, I'd want you to have real skin in the game. It obviously depends on the amount of money he's going to put in, it's a very different game if it's $100k vs $1M. But assuming that we're not talking about very large amounts, I'd want you to have something in the 10%-25% so that I know you have real incentive to have the business succeed.

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Hi Dror, Thank you for your reply. This business in particular requires very little start-up costs and then on-going SEO/Marketing costs that we can adjust as we move along. I suspect the first year will require 100K +/- in investment. I'm thinking 15%-25% too. – user9236 Apr 7 '11 at 13:40
up vote 0 down vote

It's all negotiation from here. I would definitely structure it so the new company is a separate entity--that is much cleaner. Without knowing how much money he is planning on putting in, or more details it is impossible to give you a %.

With this limited information, my best advice is let him make the offer first. First read the negotiating book "the power of a positive NO". While he has the cards, you CAN find another money source. If he knows its a winner, you should be able to get a fair percentage.

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Another great negotiation book is "Getting to Yes" and especially the workbook that goes with it. – Susan Jones Apr 7 '11 at 11:56
Thank you Susan and Landon! Landon- He will be investing about 100K +/- but it may vary as we progress. He will invest monthly, not a lump sum up front. B/c of this he has the ability to pull the plug if the company seems to be failing but also, since he is investing a solid 15k right off the bat, I don't suspect he will do that unless he truly feels its a failure (which cannot be determined in a couple months). – user9236 Apr 7 '11 at 13:44
His luxury of being able to pull the plug should decrease his equity stake. That is a negotiating point. If he can't commit to you, how can you commit equity to him? Are you expected to turn a profit off the 15k? If so, why is he planning on using 100k? If not, you're going to be in a horrible position after th 15k runs out and he's holding the other 85 and a big stake. You need to be very careful here. The terms and money need to be SUPER clear from the start. If you can't run the company on 15k, I wouldn't do the deal. What if he backs out and you feel you're doing well? Think through this.. – Landon Swan Apr 7 '11 at 14:47

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