Discussion How do you convert the capital of a business into shares?

[Battousai01]

Hi guys, I have an off-topic question and I hope you guys can help me.

My friend and I have put up a business, he gave $5,000 and I gave $2,000, total of $7,000 starting capital. I am the only one who will solely manage the business so we agreed to a 50/50 ownership. How can I convert the $7,000 total capital into total company "shares" and then split it to 50% ownership each?

I will have several sub-questions for this topic based on the article I have read off Google. The article is in bplans.com but I can't understand it. Here is the excerpt of the article in regards to my question above:

"talk about shares we mean shares in the ownership of the company. The math of share ownership is very simple. Divide the total value or worth of the company by the number of shares, and that’s the value of each share. For example, if there are 1,000 shares of a company and you know that the company is worth $50,000, then each share is worth $50.00."

My first question is, do you just decide out of nowhere or decide randomly "the number of shares" your business will have. For example, the business that my friend and I have put up, can I just say arbitrarily it has 1,000,000 shares?

Second question is, how will you know the "worth" of the company, is the worth of the company worth $7,000 since it was the total capital we have put into?

Third question is, how can I put into account my equity as the person who will solely manage the business?

 

[bbhaag]

How did you and your friend structure the business? By that I mean sole proprietorship, duel proprietorship, llc , or did you go full blown corp.
After you answer this first question on how the business is structured it will be easier to answer your follow up questions.

 

[Dr. Detroit]

1) Share count is completely arbitrary! No company has the same number of shares. There are stock splits which allow companies to make a 10 to 1 or 500 to 1 split. Your articles of incorporation will state the number of shares and can be modified at any time.

2) Valuation of a company is performed by a valuation specialist and has specific rules around it. See 409A valuation.

A 409A is an independent appraisal of the fair market value (FMV) of a private company's common stock, or the stock reserved for founders and employees. This valuation determines the cost to purchase a share​

 

[Battousai01]

How did you and your friend structure the business? By that I mean sole proprietorship, duel proprietorship, llc , or did you go full blown corp.
After you answer this first question on how the business is structured it will be easier to answer your follow up questions.

1) Share count is completely arbitrary! No company has the same number of shares. There are stock splits which allow companies to make a 10 to 1 or 500 to 1 split. Your articles of incorporation will state the number of shares and can be modified at any time.

2) Valuation of a company is performed by a valuation specialist and has specific rules around it. See 409A valuation.
A 409A is an independent appraisal of the fair market value (FMV) of a private company's common stock, or the stock reserved for founders and employees. This valuation determines the cost to purchase a share

Hi bbhaag, and Dr. Detroit, thank you for the replies. We have structured it as a dual partnership.

What we did now is we have taken into account the initial monetary investment and the sweat equity. We have pegged the monetary investment to 70% of the company and the sweat equity as 30% to have an initial company valuation. Let me know if this will work.

Also, we are not putting this up in the US, I just used the example as USD.