Sweat equity vs experience vs capital?

[MBarnott]

Hi all,

I'm not sure if this is in the correct place because I couldn't find a better sub forum here that fit this type of post exactly. So I'm in the initial stages of getting a club started up between 4 other people and I am having a bit of a hard time figuring out how to do the company shares correctly. It's broken up as follows

Investor A: 50% of seed funding but no experience and wants to be a offsite silent partner
Investor B: 30% of seed funding has good legal and policy background but also wants to be mostly a silent partner and advise on occasion
Investor C: 10% of seed funding has working knowledge of all positions (cooking, bartending, security) and is willing to work sweat equity for 3-4 months
Investor D: 10% of seed funding (Myself) has all the operational knowledge and would be tasked with getting the entire thing setup and running. I have all the networking connections and experience opening clubs from scratch. Would be in charge of all HR, Bookkeeping, management duties. Also willing to do 3-4 months sweat equity.

My question is how you weight experience vs seed money in a situation like this? For example, if let's say for brevity that the total invested was $100,000. Would you try to figure out what an advisor rate would be to open a place like this say $20,000 and factor that into the company's net worth then split it on percentages? Under that situation it would break down to

Investor A: $50k for 41.5%
Investor B: $30k for 25%
Investor C: $10k for 8.5%
Investor D: $30k for 25%

Is that a rational way to try to break it down or should the rate of experience be weighted differently?

In another situation if the last two investors in the scenario above did 3 months of sweat equity work without pay to keep cost of operations low while business grows (Investor C @ $2500 a month and Investor D at $3000) would it be factored in like this?

Investor A: $50k for 36.5%
Investor B: $30k for 22%
Investor C: $17.5k ($7.5k sweat equity) for 13.5%
Investor D: $39k ($9k sweat equity + $20k operational experience and execution) for 28%

I'd love to hear your thoughts on this because I have found a lot of different answers on the subject. If you guys know any good articles that go over in detail about the experience vs liquid capital investment I'd love to read them!

Thanks!

 

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[BizyDad]

Would you try to figure out what an advisor rate would be to open a place like this say $20,000

But you'll also be in the day to day operations, right? So $20k advisory isn't accurate. That just compensates for your knowledge. Will you take a salary? Prob not at first, I am guessing. So what's your time worth?

Keep in mind your sweat equity is worth more than the other guys sweat equity. Higher set of skills.

If something goes wrong 8 or 20 months from now, the manager quits or something, which of the four will be there to fix it?

If that is you, then are you happy with only 25%? If you are the leader of the project, if this is your goal/dream/baby you should want to keep controlling interest, right?

I guess it depends a little on how well you know the other 3, but if you are the straw that stirs the drink, then fight for greater interest. Otherwise every decision might end up in committee and that's a nightmare. You didn't call these people friends, so I am making an assumption. And yes, a good operating agreement would take care of that issue. But...

But where will your motivation be 18 months from now when the club is making bank, but you are making two silent guys richer than you are making yourself? These guys don't make any money if you don't work your butt off. Make the structure reflect that.

Personally, I'd want the control.

 

[100k]

How much would it normally cost you to hire the person to work for 3-4 months?

If it's normally around $10k ... then that should be considered their their value/investment.

Same goes for the other roles.

 

[biophase]

Here is how I see it:

Investor A: 50% of seed funding but no experience and wants to be a offsite silent partner
Investor B: 30% of seed funding has good legal and policy background but also wants to be mostly a silent partner and advise on occasion
Investor C: 10% of seed funding has working knowledge of all positions (cooking, bartending, security) and is willing to work sweat equity for 3-4 months
Investor D: 10% of seed funding (Myself) has all the operational knowledge and would be tasked with getting the entire thing setup and running. I have all the networking connections and experience opening clubs from scratch. Would be in charge of all HR, Bookkeeping, management duties. Also willing to do 3-4 months sweat equity.

Investor A & B are basically money lenders. You could replace them with a bank or anyone else looking to invest.
Investor C & D sound more like the founders of the business, the ones that will be doing the day to day.

So basically C &D could put up 20% and get an 80% loan and each keep 50% of the company.

If you look at it that way, and you need $100k, then think how much equity do I need to give up to get $80k? Maybe 30%-40%. It's up for you to decide. But look at investors A & B as silent investor bringing nothing but money (and probably headaches) to the table.

 

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[Kid]

Look at this:

source:Understanding How Dilution Affects You at a Startup

Basically if you will need more cash (and probably you will), your stocks will get diluted. 25% might seem good now - it won't if you will grow.

 

[MBarnott]

Look at this:

source:Understanding How Dilution Affects You at a Startup

Basically if you will need more cash (and probably you will), your stocks will get diluted. 25% might seem good now - it won't if you will grow.

Thanks for this I actually didn't ever know how the dilution works out with tiered funding. Very interesting

 

[MBarnott]

Here is how I see it:

Investor A: 50% of seed funding but no experience and wants to be a offsite silent partner
Investor B: 30% of seed funding has good legal and policy background but also wants to be mostly a silent partner and advise on occasion
Investor C: 10% of seed funding has working knowledge of all positions (cooking, bartending, security) and is willing to work sweat equity for 3-4 months
Investor D: 10% of seed funding (Myself) has all the operational knowledge and would be tasked with getting the entire thing setup and running. I have all the networking connections and experience opening clubs from scratch. Would be in charge of all HR, Bookkeeping, management duties. Also willing to do 3-4 months sweat equity.

Investor A & B are basically money lenders. You could replace them with a bank or anyone else looking to invest.
Investor C & D sound more like the founders of the business, the ones that will be doing the day to day.

So basically C &D could put up 20% and get an 80% loan and each keep 50% of the company.

If you look at it that way, and you need $100k, then think how much equity do I need to give up to get $80k? Maybe 30%-40%. It's up for you to decide. But look at investors A & B as silent investor bringing nothing but money (and probably headaches) to the table.

That's a good point and yes I agree it's much more attractive to look for a different type of loan situation. Thank you

 

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[MBarnott]

But you'll also be in the day to day operations, right? So $20k advisory isn't accurate. That just compensates for your knowledge. Will you take a salary? Prob not at first, I am guessing. So what's your time worth?

Keep in mind your sweat equity is worth more than the other guys sweat equity. Higher set of skills.

If something goes wrong 8 or 20 months from now, the manager quits or something, which of the four will be there to fix it?

If that is you, then are you happy with only 25%? If you are the leader of the project, if this is your goal/dream/baby you should want to keep controlling interest, right?

I guess it depends a little on how well you know the other 3, but if you are the straw that stirs the drink, then fight for greater interest. Otherwise every decision might end up in committee and that's a nightmare. You didn't call these people friends, so I am making an assumption. And yes, a good operating agreement would take care of that issue. But...

But where will your motivation be 18 months from now when the club is making bank, but you are making two silent guys richer than you are making yourself? These guys don't make any money if you don't work your butt off. Make the structure reflect that.

Personally, I'd want the control.

Yeah I would be operations and the one making the whole thing happen. The CPAs they hired seem to value liquid capital much much higher than experence and sweat equity. I think it's worth my time to find other finacial backers that either bring something else to the table or are more flexible to the bottom line.

Yeah one is a friend and the other two are just business aquaintances. The main thing is making sure that one owner can't single handedly make any irrational decisions that can't be vetoed by the rest of the group. It feels like it will get messy regardless.

Thank you very much for your input!