How do you pay your contractors with an equity position?

[Dustin Frank]

Hello BP, I have a contractor client that wants to start flipping houses. He currently has about $10,000 cash and about $20,000 in credit "Home Depot line of credit for materials." I feel confident in his drive and abilities and have decided to put about $10,000 of my own money into his first flip. The problem I am trying to solve is raising the additional capital and structuring the deal. Let's say i find an investor willing to throw in the remainder and we are able to acquire the hard money loan. How do we figure out how much equity his labor and materials are worth?

[Sean Carroll]

@Dustin Frank I would say 50%. I am counting his 10k your 10k and another investors 10k as 25% position. Then is labor and materials as another 25%. What do you think?

[Aaron McGinnis]

Carpenter wage = $xx/hr

Plumber wage = $xx/hr

Electrician wage = $xx/hr

And so on.

[J Scott]

Why not loan him the money?

There is little upside to giving a contractor equity, and lots of downside.  Unless he brings a lot more to the table. 

[Manolo D.]

Dustin Frank Why would you give him equity? Either borrow his money or lend him the money. Pay him like a contractor, get paid like an agent, and keep everything plain and simple.

[Sam Shueh]

10K is enough to pre-pay for his subcontractors. When you two run out of 20K then what?  With three cooks in the kitchen there is nothing but potential problems coming out of this llc.