Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
Many startups use profit sharing to fund their business.
It is important that everyone involved has a very clear understanding of how “profit” is calculated.
There are three locations in the startup’s profit and loss to dip in and take out a “share” to pay back an F&F investor. They are as follows:
1) Top-line revenue is the most often used.
2) Gross profit is the revenue minus the cost of goods sold or what it cost to make the product.
3) Net profit is the revenue minus the cost of goods sold and expenses.
To know how much profit to share, you must first build a financial model.
Another key issue is when to start payments to the investors.
You could set a timeframe such as 3 to 6 months out, or upon closing a customer sale.
You could set a specific amount of revenue or profit or whenever you are able to pay back.
There needs to be a limit to the amount of profit sharing. It could be a specific dollar amount or a time limit.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.