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Going into business with 2 partners, need help structuring

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GravyBoat

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I know I know, terrible idea right. The two partners are two of my friends from high school.

The thing is, this wasn't my idea to begin with, this was my friends idea. He is business minded but hasn't had any successes in the past (with business). I see huge potential in this idea. The market is proven (we have done the research). We have investors ready to put down cash.

Friend 1 wants the majority share of the business, since it was his baby technically. Friend 2 and me are both "second" in command (think CEO, CFO, COO). We are wondering if friend 1 needs to have 51% of the company in order to make final decisions on everything. Or would 40%/30%/30% work?

As far as business bank accounts go, I'm thinking of creating one bank account and getting 3 debit cards, one for each of us. For the beginning, we all make decisions together. Once we grow, we'll obviously be doing things on our own and reconciling the cards each month. Does anyone see any issues with this?

Anything else I should know? Yes I've read the horror stories. This is not my only business and it will not tie into my other business at all. We've been friends since age 10 and have already had the conversation that business will never come in between that. I will personally sell my share in the company if it comes to that and both of them have agreed to that, should something come up. I also told them that if the company grew to a certain size, I would cash out my shares or be bought out. Yes this is speculation but I feel like it's important to have these conversations before any issues arise.
 

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minivanman

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Is there a reason you need debit cards? Will you be traveling or just buying things around town? I don't really like the idea at all.

Question.... this is not YOUR only business but it is both of their ONLY business or way of making their base income?
 
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GravyBoat

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Is there a reason you need debit cards? Will you be traveling or just buying things around town? I don't really like the idea at all.

Question.... this is not YOUR only business but it is both of their ONLY business or way of making their base income?
One friend has his needs covered by his aunt (she's 90, he takes care of her, she pays him and lets him live at her house (in West Hollywood). Other friend just graduated college with a math degree, and is moving in with friend 1. I live 2 hours away in San Diego so I will be up there alot so we can all work together.

We need at least one debit card for purchasing things for the business (ie taking clients to lunch, buying office supplies, buying software/tools, etc. We could probably get away with just one, but what's the difference between 1 and 3 if everyone can use it anyway?

As far as the money situation, we are debating with asking for salaries from investors. I've never dealt with this before. Is that customary?? I personally don't need the money but the other two guys could use it, especially friend #2. Otherwise part time jobs will be necessary for them, which they are okay with.

Neither of them have to pay rent so they could easily get by on like $10, $15k/year for starters.

This business will NOT make money within the first 3-6 months. I wish I could explain it on here but it's a long term play.
 

ZCP

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More importantly:
How many have you sold?

Answer to your question:
Map out the business on paper as it might run 1 year from now. What is everyone's responsibility? Who is the backup in each area? How have profits been distributed? What if no profits? What if you need to put more money in? How does that change the equity?

Write up a full operating agreement and talk through it together. Add a shotgun clause. Talk money and what ifs.

If you get through all of that without anger and resentment, you may have some business partners. Now get it drawn up by a lawyer and signed. In the meantime, do your MVP / mkt and see if you can get some sales.

Also:
Without a proven track record, investors are very unlikely to put in money to pay salaries. You'll have to self fund that part.

Who is doing the books? Who is checking them?
 
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GravyBoat

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More importantly:
How many have you sold?
Z, good to hear from you. You gave me your card at the Summit. Hope everything is going well on your end.

This is an odd business model. Can I shoot you a PM to talk about it?

Write up a full operating agreement and talk through it together. Add a shotgun clause. Talk money and what ifs.
Doing this as we speak with real dollar values. (If this many customers, than this, average "sale price")

Also:
Without a proven track record, investors are very unlikely to put in money to pay salaries. You'll have to self fund that part.
Good to know. We are trying to get as little seed money as possible. Less to pay back.

Who is doing the books? Who is checking them?
The math guy is doing the books.

We have a lawyer on deck ready to do all this. I'm fronting some money to pay the lawyer, but we are going to need multiple very soon.
 

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Write up a full operating agreement and talk through it together. Add a shotgun clause. Talk money and what ifs.
I cannot emphasize this enough. Make sure there are clear-cut ways of getting rid of partners if they aren't pulling their weight.

Make sure your businesses entity is correct for the type of business and exit plan you have. Also, assume anything that is discussed but not written down will be conveniently "forgotten" at the exact moment it's relevant.
Get everything in writing.
Everything.

Ownership percentage isn't necessarily tied to decision-making. For example, if you have an S Corp, you technically can only have one class of stock. However, the IRS has said that voting rights do not constitute a separate class of stock. So your friend could own 40% of the stock, but 100% of the voting rights.
 

Stargazer

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As far as the money situation, we are debating with asking for salaries from investors. I've never dealt with this before. Is that customary??
Nothing for you to debate.

Don't ask people to dip their hands into their pockets to pay your living expenses.

That is like saying to an investor 'I am prepared to risk absolutely nothing'

Dan
 
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GravyBoat

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Ownership percentage isn't necessarily tied to decision-making. For example, if you have an S Corp, you technically can only have one class of stock. However, the IRS has said that voting rights do not constitute a separate class of stock. So your friend could own 40% of the stock, but 100% of the voting rights.
Very good to know. Thanks a ton. I scheduled a meeting with my local SBDC to discuss this further, then once we all agree on something, we'll get it legalized.

Make sure your businesses entity is correct for the type of business and exit plan you have. Also, assume anything that is discussed but not written down will be conveniently "forgotten" at the exact moment it's relevant.
Get everything in writing.
Everything.
I live by this. Absolutely.

Nothing for you to debate.

Don't ask people to dip their hands into their pockets to pay your living expenses.

That is like saying to an investor 'I am prepared to risk absolutely nothing'

Dan
This is exactly what I was thinking. Plus, it's a detriment to us since you have to pay it back with interest/equity anyway. We're getting our ducks in a row before going back to investors. We basically just had 3 or 4 high net worth individuals tell us they would write us a check. We had a follow up with one of them that had some more questions and that went really well, but we haven't gone back yet.

I'll keep y'all updated. This is exciting stuff.
 

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