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I'm currently supervising a project with investors, and the following problem arrived:
- How should I calculate the profits of each investor, i.e. should profit itself (after taxes and other deductions) be proportional to a (invested amount x time past since investment) factor, or should total revenue (amount invested + profit) be proportional to this factor?

I am a total newbie when it comes to these things, and I want to be sure I'm not using the wrong model here, as so not to have an investor complaining to me on how they should have earned more than they did. Also, an explanation of what each model is better for and maybe other models would be great!

Thanks in advance.

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    I find the question itself disturbing. Not just that you find yourself in a position of managing money without knowing how to handle this, and not that these people trusted you with their money, but that as a group, there was no agreement in place to codify these issues before putting up the money. – JTP - Apologise to Monica Mar 17 '13 at 16:17
  • @JoeTaxpayer Although I understand your concern, there is no need to worry so much. This is a very small group (mostly people of our family), and there is little money involved. Although I certainly agree we should have though of this before, it is something everyone is involved in, i.e. it is done by everyone's hand, I'm just in charge of the spreadsheet and of receiving a little administration money). You could say we are all ok with defining it now, and would like to know the meaning behind different models. – Marcelo Zabani Mar 17 '13 at 18:07
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To avoid having it become overly complicated, I suggest it be run as would a mutual fund. Mutual funds transact each evening to set a price. Transactions for purchases or sales are done at that price each evening.

Initially, you have a dollar amount invested for each person. You can calculate the percent of the 'fund' each has, and, assuming the total is under $10K, 7 digits after the decimal accuracy is enough to track each share to the 1/10 cent.

When new money is added, that night, you calculate the exact value of investments, and add the new funds, so each person now has a smaller share of the larger fund.

If you wish, you can normalize this to 'share value' so my initial investment of $1000 is 100 shares regardless of the total amount invested. Then when new money comes in, the 'shares' increase as well. This may feel better as a declining percent may just seem awkward, even though that's the case.

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