Answer to Question #65072 in Finance for Alin Zamudio

Question

I was recently approached by a friend (who I consider highly competent) who is looking for financing to open up a franchise. Lets assume the opportunity generally makes sense. My question is: is there a model/literature/best practice for determining how ownership of the franchise should be determined between me (providing 90%+ of financing) and the operating partner (providing basically management and expertise). Thank you!

Answer 1

The fact that you are contributing 90% of initial capital does not necessarily translate to 90% of equity. The securitization of your contribution into a loan will make it easier to calculate your fair contribution and also compensate you for your risk.
It is also common that co-founders of start-ups forgo their wages at the start of the company. It can be also suggested to translate of forgone wages into loans or preferred stocks.
It is also important to divide control and decision making of the company.
So, you should decide all the details with your partner about the ownership and other things.

Reference: https://www.forbes.com/sites/dailymuse/2012/04/05/what-every-founder-needs-to-know-about-equity/#726842f3668a