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Lets Say Entity M manages construction project . A Contributes 500,000 USD at the beginning of the project. after 3 months B Contributes 1,000,000 USD to the project. after an year from the starting date project completes and M makes a 1,000,000 USD profit and M takes 200,000 USD as Managing Fee. How to Share remaining 800,000 USD between A & B ?

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    Welcome to Money.SE. Is this something you are facing now, or is this a hypothetical? It's likely to be closed as unanswerable unless you can answer some very specific details on what occurred during the 3 months. – JTP - Apologise to Monica Jan 12 '15 at 11:07
  • this is a real scenario actually we are the managing partner – Brix Crix Jan 12 '15 at 11:12
  • what does the partnership agreement say? – mhoran_psprep Jan 12 '15 at 11:29
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    When B makes their contribution you need to decide how much a portion of the project they are purchasing. The answer will depend on if they are just a money source or if they are also acting in management role and need to also be paid a salary. – mhoran_psprep Jan 12 '15 at 12:52
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    A invested 1/3 of the total investment and B contributed 2/3. So everything else being equal that seems like a fair profit split. It's would also be unsettling if a "real scenario" involving millions would be a question on SE. – AbraCadaver Jul 7 '15 at 20:18
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From my understanding, only A and B are shareholders, and M is a managing entity that takes commission on the profit. Assuming that's true.

At the start of the project, A contributes $500,000. At this point, A is the sole shareholder, owning 100% of the project that's valued at $500,000.

The real question is, did the value of the project change when B contributed 3 month later. If the value didn't change, then A owns 33.33%, and B owns 66.66%. Assuming both A and B wants to pay themselves with the $800,000 profit, then A gets a third of that, and B gets the rest.

However, if at the time of B's contribution, both parties agreed that the pre-money of the project has changed to $1 million, then B owns half the project valued at 2 million post-money. Then the profit would be split half way.

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There's no unique way to split the profit, it's about claims and arguments.

I propose the approach based on internal rate of return. Consider we have a project with cash flow -500 at the beginning, -1000 at 3 months and +2300 (1000 profit - 200 fee + 1500 of initial investments) at 1 year. The balance looks as follows (simple compounding):

-500*(1+r) -1000(1+r*0.75) = 2300

The solution is r = 64% (not bad!). Now, the value of the 1-st investment is 500*(1+0.64)=820 and the value of the second is 1000*(1+0.64*0.75)=1480 (at t=1 year).

This gives the shares of 35.65% (820/2300) and 64.35% (1480/2300). Then split the profit according to the shares.

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