Quote:
Originally Posted by YoungEcon
Interesting question. I probably don't know the answer, but I'll take a crack at it just for fun.
Are you saying that you'll set up a contract where you agree upfront on the total price for the 50% stake, and then sell off 1/10th of it every month? I guess you could do it that way, but it seems like a weird contract. If you're doing it this way, you may also want to get a premium, so if you invest $5000 you could charge interest (unless maybe by investing $5000 now, you're going to earn some premium off the business anyway).
There's obviously numerous ways to do it. I'm not sure what the best one would be, but here's some ideas.
1. You could try to do it like an option? For a fee, you give the owner the right but not the obligation to buy 50% of the company 10 months for now at some strike price. Not really sure how you'd set the strike price and fee.
2. You could do a discounted cash flow. You'd have to forecast what the cash flows from owning 50% of the business would be from months 11 and on. And then figure out what that's worth today (i.e., the present value of that stream) and what price you're gonna agree to sell it for. In practice, you'd probably have put together a contract that both parties could agree to ahead of time. For example, if you both think the profits of the first 10 months will have some relationship with profits for months 11 and on, then you could specify that relationship and write a contract based on it. Like maybe you think that profits in the first 10 months will be similar to profits for months 11+, then you could use those as estimates. Or, if you think profits will be higher/lower in months 11+, you could try to specify that with some functional form (like exponential or logarithmic) and write a contract around that. If you have any financial statements for the company, I'd love to take a look at them and see if I could come up with something that you could use since I think this is a pretty interesting problem (assuming this is related to a real investment opportunity).
Edit: I assumed this was a startup. If it's an established business, then I guess you wouldn't necessarily have to use only those 10 months, and go use historical figures.
This is a real opportunity and since you showed some interest I will give you the real facts. I left out details to simplify it and get some responses.
The opportunity is a food cart, in other words a trailer converted into a kitchen that is parked in a downtown area and sells food at lunchtime.
Like this..
It would be a start-up, the investment covers the purchase of an existing cart and their lease and all the materials to get it prepped and ready for business.
In fact, my investment is only a 50% stake itself. The $5000 figure for my share was accurate. An existing restauranteur is the other partner. My friend wanted to do it herself but doesn't have the capital, so she wants me to put up a 50% stake with the promise to sell her half of my equity. I think it is a good opportunity due to the location and the know-how and experience of the restauranteur. As an anecdote, one of the carts in the same area sells $700 per day on a good day. Carts in this area are only open weekdays 10-3. Also the cart itself has some concrete value and can be re-sold if we totally fail, so I don't see losing my whole investment.
So I am promising to give up shares of my equity to get involved. I am OK with that because I think I can gain some income at both a 50% level and a 25% level. I just want to make sure that the exchange I agree to with my friends is fair for both she and I.
The root of all issues comes down to the changing value of the business over the time which it takes for my friend to purchase her whole equity share. As I said in my OP, it doesn't seem right to say her first share, bought when maybe we have only been open a week and have no idea how we are going to do, is worth the same as a share she buys months later when she knows we are banking $3,000 per month in profits. Obviously they mean different things to me since I am losing shares in that profit. Conversely, if we are tanking my friend can just stop buying shares, putting added risk on me at no cost to herself. That is obviously bad and should be avoided.
I am starting to think of this more as a loan and less as selling shares in a business the more I write about it. Which makes me think we should just draw it up that way. That way she is in on the risk and reward from the outset and just paying me for helping her get involved on the ground floor.
Another idea I had is that my friend is going to work at the cart for a wage. I thought perhaps we could structure her wage as such that it is part cash, part equity. That way her investment is more guaranteed to be forthcoming.
Since this is a small investment we can be creative. I am new at all of this so the best way to do it is not obvious to me. Thanks for taking the time to respond.