Know-How Exchange : Strategy

No. You must evaluate the individual's contribution as a whole. And you must realize that you are heading-up the effort. Those two concepts should get you looking in the right direction.

Equity is a much more complicated formula. Start with the company's valuation. If the idea (upon successful execution) is worth $2M, then $20K buys a percentage of that valuation. And profit is a separate issue from equity. If/when you sell the company, then the investor gets their percentage of the gain. Talk to a legal specialist before you accept any funds so you better understand what you're getting into. You may wish to read (if you're in the US) "Incorporate Your Business" (by Anthony Mancuso) for some background information.

Heed the advice above from Mike and Jay. Investors are not entitled to a portion of net income. They are equity shareholders and participate in the proceeds from a sale, or from declared dividends. You need to consult an attorney and an accountant if you want to take in investors.

As part of my consulting service, I create detailed business plans for start-up companies, including the projected investment in, and valuation of, the companies involved over a period of years (typically 5 years). You need to create such a business plan for your venture so investors know what to expect and when to expect it. This will also force you to think through your costs and marketing plans in some detail -- and ultimately provide a great measuring stick and control mechanism as your business grows.

If you are interested, there is a sample business plan and template in a report available from MarketingProfs as part of a seminar series (https://www.marketingprofs.com/marketing/online-seminars/110) or as a stand-alone report at https://bit.ly/SstLq2 . (The stand-alone report also covers the 3 pitfalls facing most new businesses.)

First, we are a marketing site, not a finance site. many of us have experience that can help, but we generally are not experts. Something to keep in mind.

Equity is all based on the value of the company. A startup in such an early stage doesn't have a value that you can set using calculations, so is really just a guess. This guess is based on what each party thinks the company will look like in the future (the value at a future date, the chance of succeeding, how much more equity will be needed to succeed, etc.). So the value will be what you and the investor agree to. You want to give away as little as possible for the highest value possible, they want to get as much as possible for as little cost as possible.