Forums: Discussions for entrepreneurs and small business.

As CEO of a small business, I have a couple friends working with me who are able to contribute roughly 10 hours / week, while I will contribute over 40 hrs / week.  To address this imbalance when profits are distributed, and to account for the potential for inevitable changing circumstances (e.g. one of us leaves, or one of us "goes full-time", one of us has a kid), I suggested that we use the following model.

1. Create Phantom Shares (no ownership is implied), issuing them to each person each week in proportion to his estimate of the number of hours worked.
2. When profit distributions occur, profit is distributed according to the percentage of shares currently owned by each partner.

Is this a common profit sharing scheme?  Do you agree with it, or have any particular criticisms (and if so, can you suggest a better method)?



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How to Start and Master a Computer Business

Good question, Molly.  The business is owned entirely by me.  It is an LLC.


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How to Start and Master a Computer Business

I gather that none of you are getting paid for the work you are doing. If so, the idea of each person being compensated for their time by sharing in the profit is workable and you don`t need to create any "phantom" stock to do that. As previously mentioned, using hours presumes that each hour from each person has the same value. Consider how you will feel about distributing (based upon your scenario) 1/3 of the profits to them if (when) the business is successful.

Over what time period do you intend for this to operate? ( forever, one year, until they have received a specific amount)?

If you want to discuss the details (in confidence) of your situation, feel free to send me a PM.

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

As long as they work the same number of hours as me, I am fine with distributing profits equally among ourselves.  This profit sharing plan would be in effect indefinitely (until we all agree to change it or are bought out).  The profit sharing plan accounts for situations where additional employees/contractors enter the business, or investors contribute to it.


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How to Start and Master a Computer Business

There really are several issues:

1. Fair compensation to each person for their efforts (time). You may have a difficult time paying everybody the "same" hourly rate.

2.Distributing the results of the business operations (profits)

3 Portion of the value of the company (ownership/equity)

4. Control of the direction and decisions.

In your scenario, you would be the only one who benefits from selling the company while the others could lose compensation. Also, the "deal" you have with your "employees" would likely deter any serious investors.

 

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

For the original founders of the business (three of us), I can`t see a more fair way to compensate than in proportion to the time spent.  Profit distributions would be made in proportion to total hours spent toward the business.

Ownership is simple: we agree that the business is mine.  I have registered the business and am its sole owner.  They understand that the business is mine and that I have the final say when it comes to direction and decisions, but of course out of recognition of their large roles in the business, I will choose to consult them and make sure they have their chance to shape and influence my choices.  They acknowledge this.

Upon selling the company, each of us would receive a fraction of the reward proportional to our total hours invested at that point.  Is there any reason that such an agreement cannot be made?  Do they really have to own shares, or be "partners" (as opposed to independent contractors) to benefit when the company is sold?



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How to Start and Master a Computer Business

This is just about the only way to monitor it. however, cant really measure time as a measurement of the contributation

Time seems to be the best measurement though.  Can you think of a better measurement for a web startup?


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How to Start and Master a Computer Business