Division of Equity for early stage ventures
Keywords: venture investment, funding, equity divide, founders equity.
Scenario: You are the founder of an e-commerce venture where you’ve stabilised the operations and revenue within 2 years of business launch. Now, with an intention to grow business globally, you're planning to on-board few business partners who will help you to scale business operations at a new locality (for ex. USA). These business partners also interested in investing some capital to bear operational cost for initial days. Founder also don't want to share their existing operations/revenue from home run setup with new partners, hence this partnership would be applicable for new locality (for ex. USA) business operations only.
In that case first you need to carried out the, market research for target audience (like consumers, external partners) their behaviour analysis, present competitors, estimated cost of customer acquisition, cost of service delivery as per regional regulation, training and support cost, technology and infrastructure cost, operations, maintenance and financial surcharges (if applicable) etc.
- evaluate your partner ability to acquire proposed commercial success. You can do this by creating quarterly or monthly milestones for example 'x'% of new order within 'y' time-frame of venture launch etc.
- create an estimations of resource and capital required to achieve that 'x%' within 'y' time interval. Don't calculate this figure for more than a year or two. It will give you time to change your strategy or on board new partners without an opportunity cost in USA market.
- Your opportunity cost of developing the brand for 2 years : business legacy expenses
- Cost associated with getting the supplier and design work : product delivery expenses
- LLC formation cost in the US + US trademark cost : business incorporation expenses
- Capital investment by founder for US business : founder capital investment or F
- Capital investment by new business partner : partner capital investment or P
F + P = total cost to acquire revenue 'R' within 'T' time-frame
If both partner and founder have agreed to put equal efforts in achieving the business goal than equity should be distributed equally, where new venture would be liable to pay 'business legacy expenses' to founder separately (from the profit earn through US business).
Otherwise, you can explore multiple ways for example:
- Crate an estimated cash flow (with business plan) for 'T' time frame (1 or 2 years) to acquire revenue 'R'. Now define the equity distribution on the bases of value proposition(RoI) for both founder and partner. Here add 'business legacy expenses' as founder's investment.
- Founder may keep all legal business right with their Vietnam venture and incorporate new US company as its corporate branch or distribution subsidiary. Create a partnership agreement to run operations together for 'T' time period to sell 'z' units of products. Now distributed the equity on the bases of required cash-flow and estimated value proposition(RoI). Here, founders own the legal business rights hence he can't claims his 'business legacy expenses' although he can declare a fraction(<20%) of it as capital investment.
- Use 'Slicing the pie' mechanism.
Their is no standard ways for equity split, most of VC prefer Cash-flow estimation method whereas other methods used by early stage ventures. The choice is yours.