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FORTUNE Small Business:

Should I give my business partner equity?

The owner of a social-networking Web site in India hires a COO, and wonders how much equity he should offer.

By Anne Fisher, FSB Magazine

(FSB Magazine) -- Dear FSB: My Web company, Careeb (careeb.com), offers social-networking and online-classifieds services, similar to Craigslist but for the Indian market. I asked a friend to be COO and handle the technical side of the business. How much equity in the company should I give him?--Naveed Ahmed, Founder and CEO, Careeb Hyderabad, India

Dear Naveed: It's generous of you to want to cut your friend in on the equity - maybe too generous. I asked several experts about it, and the consensus is that friendship doesn't necessarily mix well with business.

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"I recommend you keep 100 percent of the equity," says Douglas Cumming, who teaches entrepreneurial finance in the MBA program at Rensselaer Polytechnic Institute in Troy, N.Y. (rpi.edu). "If your company is like Craigslist, the technical side is not very difficult," so that you could easily hire someone to do it for a straight salary and benefits.

Rather than handing your pal a chunk of the company right now, Jordan Klear, a managing director at Denver-based private-equity firm Tivis Ventures (tivisventures.com), suggests doling out shares over the next several years based on his performance.

"Set aside a portion of your initial capitalization so that you can offer shares or options later to people who will be relatively hard to get, like a top-notch chief financial officer." (I'm bracing for a flood of mail on the pros and cons of turning friends into business partners. Bring it on!) Top of page

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