Equity share & profit share - What's the difference?

[lolage]

How do these two differ? Was negotiating a % of a friends company and he's happy to give 50% profit share - but only want's to give up 25% equity (not 50%).

I've made it clear before he dropped the equity bombshell that I'm happy to put 50% of my own money into future things that needed to be bought (stock etc) but surely if I only have 25% equity I'd only be entitled to put 25% of the money into it?

He want's to work it in a milestone format where I eventually get 50% equity but the whole thing just doesn't make sense to me.

 

[Scalloway]

There could be different classes of share that get different rates of dividend.

 

[Energise Accounting]

I take it you are talking about a LTD company. Your mate is offering you 25% of the shares in the business. so unless a different class of shares are being created you would only receive 25% of the profits.

 

[lolage]

It's a LTD company - and is offering me 50% profit share, but 25% equity. It just makes 0 sense..!

 

[Scalloway]

This is how it could be done

100 Class A shares that get dividends. Each of you gets 50
200 Class B share that don't get dividends. You get 25 and he gets 175

You own 75 (25%) shares and he owns 175 (75%)

 

[Energise Accounting]

@Scalloway has explained how it could be achieved. The whole area of share classifications can be complicated and a separate shareholders agreement should be drawn up. for example
100 class A shares each get 50
175 class B shares full voting rights (to him)
25 class C shares no voting rights (to you)

It is a good idea to speak to a Accountant and Solicitor before you proceed. and even if gave you 50% of the shares they could be issued with no voting rights, that way he will control the company.