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 ?
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.
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.