Should I take into account an investment in terms of software as a sunk cost?
One of my partners, in an online service startup, is going to put the software design as his investment and share on equity. The rest of us are putting in time and money.
But now came up a question that I cannot answer exactly. Should I take into account his investment, in software design, as sunk cost?
Equity Startup Costs Cost Investment
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How would his contribution being considered a sunk cost or not affect things, in your mind? – rbwhitaker 11 years ago
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His contribution is the soul of the service provided actually. I misspelled his contribution in the venture on the description, he is going to put the software development, so his contribution is an important part of the project. – Christian Rojas Alves 11 years ago
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But what difference does it make if you label it as a sunk cost, label it as not a sunk cost, or choose not to label it at all? – rbwhitaker 11 years ago
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Yes, you're right. I realized that it's a cost they will inccure on as their investment which won't affect us as a company. Than you for your time. – Christian Rojas Alves 11 years ago
2 Answers
Sunk costs have nothing to do with this.
You need to exchange something tangible for the equity. It's called consideration.
Emphatically, just exchange money for equity. Everyone at the table should want to do this, it keeps the legal considerations simple. The initial purchase price of the stock is often absurdly cheap for this reason.
If you're not organized as a corporation, you need to get legal assistance now and do so. There's also web services that can set you up with prepackaged documents for a small fee. If you are investing amounts of money disproportionate to your share of the company, you're going to want to get a lawyer involved.
More importantly:
- Just get to work on your product. The details of incorporation are important, but you've got other things to be worrying about.
- Make sure your team shares the same vision and sense of scale for this venture. It's best to part ways early if someone isn't actually looking to be a startup co-founder.
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thanks for the advise – Christian Rojas Alves 11 years ago
An investment is not a cost... (unless it turns out to be useless)
From logical (and also accountant) point of view, it remains a contribution to the company's capital. If you bring money, computer, car, clients (goodwill) or know-how, it still remains an investment.
