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Splitting Profits in a Startup and WayUp

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As startups become ubiquitous, so does the need for those with backgrounds in business and economics in order to manage the cash flow of a company.  This article describes the various ideas to think about when partnering with others in a startup business.  The article begins by asserting that it is necessary to first formally set up a business in the sense that it should have a rigid structure.  Joining members can be labeled as a general partnership or a limited liabilities partnership.  Structuring a business helps give you more bargaining power.  The rest of the business describes various points of considering when expensing partners and your bargaining rights.

Relation to class:

The startup world is interesting as there are virtually no barriers of entry.  The skill required to work at a startup is generally just a general technology background and in some cases, employees don’t even need a formalized education.  This generally leads to exploiting college students by offering them little to no compensation upon joining the startup, but promising equity if the business is successful (a classic scenario of this is a businessman approaching technologists stating “I can handle the business side).

This, almost by definition, relates to bargaining power.  In this case, let’s consider a graph with many nodes representing college students and fewer nodes representing startup businesses.  In this graph, the startup has virtually infinite supply–nearly every college student has the skill set, is able, and is willing to work.  Because of such a large supply of college students with a technology background, the bargaining power of the students is quite low and they can be taken advantage of.  An employer’s dominant strategy is to employ the student who is willing to work for the least amount of money.  So here, the startup companies have the most bargaining power, and the college students have the least.

Legitimizing a business can increase it’s bargaining power.  The article mentions several forms a business can take and how it can increase revenue by simply restructuring it.  The article also mentions the need for a written legal agreement delineating the terms of the partnership and an outline of compensation.  Once again, this relates to bargaining power, as the more legitimized a business is, psychologically, the bargaining power increases.

On a slight, but related tangent, some companies are emerging to match college students to startup businesses.   These companies aim to act as an intermediary providing a method of screening under qualified applicants and producing young talent for startups.

This relates almost entirely to the concept of trading networks.  The company in the middle is the matchmaker–matching students with employers.  If a student demands too much compensation or is overqualified for a company, the exchange will not occur.  Furthermore, these types of businesses aim to also profit, so there is a slight disparate between the offer price (how much students are willing to receive in compensation at minimum) and the sell price (how much employers are willing to pay out to employees).

I foresee these types of businesses being successful in the future as the demand and supply for technology related careers increase.

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