Need ideas for equity split in new business

 

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Need ideas for equity split in new business

I’ll try and keep this as concise as possible.
Its an HVAC company.

3 partners

Partner 1. I am the owner of another business that gives me access to a ton of potential clients. The amount of clients I can provide would scale exponentially year over year. I can also cover all start up costs. But aside from reading financial reports and being a part of big decisions I don’t want to be involved in running the company

Partner 2. Old friend I have worked with before. We are an excellent team and think exactly alike. His work ethic is huge. He is trustworthy. He is pretty sharp. And he has plenty of experience as a general manager from other companies. We share the same values and customer service standards. He has limited mechanical and hvac experience but would need school and 3 years on the job to get his master mechanical license.

The original plan was to just wait this out and go with partners 1 and 2 with me controlling in a 51/49 split.(lots of extra details in regards to protecting my investment and him buying in.) But that’s 3 years. Enter partner 3.

Partner 3. Has 20 years experience and a master mechanical license. We could get going right away. Already has a small residential hvac business but mostly does work for a larger company. Would probably also bring in equipment (vehicle/tools). Obviously this guys experience would be valuable too.

I have a meeting with Partner 2 on Monday to come up with some ideas for how we could integrate partner 3. We want to have a plan before our meeting with Partner 3. If I bring in Partner 3 I feel like there isn’t much there to justify Partner 2s existence. But Partner 2 is who I really want to work with.

So. 2 questions. Would you wait and keep it at 2 people? Or would you integrate Partner 3?

If you would integrate Partner 3, how do you think things should be split? I don’t know this guy yet. Despite high reccomendations I am wary.

Thanks in advance!

Edit. Both of these guys are going to need to be paid while the company grows. I won’t be taking any draw from the company until their basic needs are met. Of course this needs to be factored in.

Edit 2: thank you all for providing your input. I gained a lot of great perspective and I have a ton to think about.

Need ideas for equity split in new business

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9 Replies to “Need ideas for equity split in new business”

  1. The new guy could be a wild card. Go with a ccorp and some initial split and including vesting over time and a mechanism for deciding vesting so one individual can always be diluted away if they don’t pull their weight. For initial split consider based on effective capital(cash, tools, a vehicle, etc). If ownership of the item isn’t changed, don’t do that

  2. A lot will depend on who’s actually doing the work and who’s putting in money. From your description, I’d split it 51/49 with you in control with Partner 3 and when partner 2 is ready to be on the job full time, then you guys can add him in. Ownership % is flexible depending on how you set it up and what legal entity you use. Don’t give partner 2 ownership until he’s ready to contribute, maybe he puts up money or something else, but ownership has to be equivalent to contribution. Also.. a lot can happen in 3 years, maybe this business will have already taken off and you won’t need partner 2 or maybe you’ll still need him. Thing is, you don’t know, so don’t give equity away unless they will be contributing directly to the success of the business. Another discussion you’ll need to have is how to pay living expenses for you and your partners, and depending on the legal entity you set up, there will be different tax implications.

  3. Where I am, mechanical licenses can be attached to 2 different companies. It’s common for a license to be rented by another company. Consider that option. Then set up LLC with person #2.
    Personally I’d have a hard time renting my license (I have a residential general contractor license for my state). I’d want to make sure that no liability issues would exist for me. So check with your insurance agent how to protect that guy you’re potentially rent from.

    With any partnership or subcontractors, i always do a criminal background search and a recorders office search. I dropped an HVAC sub due to non-payment of payroll taxes (there was a tax lien) that showed up in the recorders office. You don’t want that to come back your way.

  4. This is the stuff my nightmares are made of. I had a 50/50 split with a partner and there were points he tried to convince me to sell off some equity to a third party for some capital that I refused to budge on. I said I’d rather work harder myself and go without, then have to bring in another person. My instinct was right, my partner wanted to get out after 2 years and move on with his life, and he tried to sell his stake to random people who would not have helped at all in the business and purely expected profit.

    We had no established contract indicating that ownership involves actually working for the company. So, I would have been hit with 100% of the workload while handing over 50% of the profits. In the end I had to take out a loan and buy out my partner to prevent me from being stuck in business with somebody I don’t even know who doesn’t do anything. Our relationship soured in this duration and the business suffered for it.

    It handicapped me at a time I needed to be expanding. If I had to start over I would have tried to get 100% ownership from the beginning. The only difference between 100% and 51% ownership is you get half the money, but you still have 100% of the responsibilities. What recourse do you have if one of your partners is handicapped and can no longer work? What if one dies and his family gets his equity stake? Are you going to train the kids in HVAC?

  5. OK, so:
    1) Partner 1 doesn’t want to do the installation work. What do you estimate you will lay out as working capital?
    2) Partner 2 has no experience but he’s your friend, and trusted, and you want to help him out. His investment is sweat equity.
    3) Partner 3 is already in this business but apparently wants to be busier.

    I agree that partner 3 might obviate the need for 2. Are you getting into the business to help #2 or for yourself? If it’s for yourself, then hire your friend part time in the business while he gets training. No equity.

    You say that you have the potential to scale exponentially, but that’s not ever going to happen with 3 dudes. You’d need to be a referral service to grow. #3 is already competing with you and there’s nothing stopping him from doing work on the side.

    I’d look at other business structures, for example, marketing agreements with partner #3. Scaling exponentially sounds unlikely, but if your leads are golden, then your partner #3 is going to be a burden when you scale past his abilities to keep up.

    I’m not sure that I see the same opportunity here, but maybe I’m wrong.

    .#2 can’t do anything on his own yet
    .#3 doesn’t necessarily need you to do his job

    I’m also basing this on the current economic situation. Finding cheap talent might not be a problem and you might be giving too much away.

    You could essentially treat your company as a marketing service and rebrand the HVAC services of other companies. In that case, you’d own 100% of it.

  6. I don’t have an opinion whether you should hire them as contractors or split the equity.

    However, if you decide on splitting equity, then I would definitely recommend a dynamic equity split.

    Basically, instead of agreeing on a split at the beginning, you agree on a method of continuously calculating the equity until IPO or until Series A or until the business is profitable.

    This is by far, the fairest method that I have ever seen. It is very helpful if you want to avoid situations where you agree on let’s say 50/30/20 but the 30% guy actually is doing much less work than the 20% guy. And regardless of how hard they promise to work on Monday, what really matters for your business is how hard they ACTUALLY worked after one year.

    I strongly recommend reading the book Slicing the Pie or at least reading through some of the summaries:

    [https://www.linkedin.com/pulse/using-slicing-pie-fair-equity-split-part-1-why-bother-tom-horecki/](https://www.linkedin.com/pulse/using-slicing-pie-fair-equity-split-part-1-why-bother-tom-horecki/)

    [https://medium.com/@ben_longstaff/how-to-slice-the-equity-pie-fairly-a316b884dfa9](https://medium.com/@ben_longstaff/how-to-slice-the-equity-pie-fairly-a316b884dfa9)

    [https://www.quora.com/What-are-the-pros-and-cons-of-the-slicing-pie-method-of-dynamic-startup-equity-distribution](https://www.quora.com/What-are-the-pros-and-cons-of-the-slicing-pie-method-of-dynamic-startup-equity-distribution)

  7. Just start getting jobs/contracts and then hire someone to run daily operations. So much simpler, what you’re proposing is going to end extremely messy because inevitably one of your partners is not going to be pulling their weight (and why should they?, you’re just giving away equity up front…they can sit back while you build the company and cash out when you go to sell.

    And to boot you’re going to pay them a salary while you take nothing home for all your efforts? Don’t want to sound like a dick, but this is a fairly shit business plan.

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