An equity investor chooses among three options in sharing ownership in your small business. These are the only options available, even if the consideration for the ownership share is something other than cash, such as labor, materials, and so forth:
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General partnerships.
A general partner joins you in owning the business. He shares in your profits and losses in proportion to his partnership share. General partnerships work best when all partners work full-time in the business. Equity investors normally prefer not to become general partners, because they don’t want day-to-day involvement in your business.
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Also, by law, if the partnership loses money, the investing general partner must pay back part or all of the losses. Everybody has heard stories of partnerships that went sour, with dire consequences. These were usually general partnerships. If you are interested in forming a partnership, limited or general, or learning more about them, see Form a Partnership, by Denis Clifford and Ralph Warner (Nolo). Chapter 4 | potential sources of money to start or e
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the promoter, may get as little as 25% of the profits plus a reasonable salary for your work to make the project go. Of course, it is rare that a person who starts a business doesn’t invest at least some of his own money, so the investors’ percentage would normally be adjusted downward.
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Another alternative for a start-up business where investors bear the entire risk of loss is for the founder to work in the business on a daily basis and receive a small wage as a project expense. The first profits are used to pay back all the money advanced.
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Profits are split on an agreed percentage. If the investor puts up all the money, this might be 50/50; if the investor puts up less, his share should also be less.
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Sometimes these profit splits terminate after a specific number of years, and sometimes they continue indefinitely.
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Occasionally, the parties agree on a formula to establish a price for which one party may buy out the other party in the future. If you’re expanding
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