

Ask HN: Fair share deal between me and my cofounder - anotherguy

Hi,<p>let me quickly explain my situation. I quit my job in March this year and started working on creating a prototype which 
is nearly ready to launch now (we just need a few more servers). During that time I exchanged the ideas I had with a
friend of mine. He quit his job 3 months afer I do and after I finished the prototype (he probably wouldn't have quit
his job if he hadn't seen the prototype working).<p>The inital impuls, ideas and also the ideas we are now following all come from me. I also relocated back to my hometown. We also got accepted
in an incubator and got free offices and coaching for at least 4 months, which I would say, is mainly because of the working prototype I 
created.<p>We are probably exploring two different business ideas at the same time. One idea is a pure search related web startup. For that case I definitely don't
need my cofounder (as he is more the business guy), and if I would like to have a cofounder for that part, I would definitely like a technical person. 
In addition to that we are exploring a more tradional business (we are resuing the software I created to sell a service to local companies). This one requires 
selling stuff to people and this is where my cofounder comes in. I'm pretty sure I can't do both things alone.<p>Anyway, for the second type of business there are two parts. The technial one (I nearly completed) and the selling part, which then has to be completed. Now, 
I don't know if my cofounder is even good at doing this (as he doesn't have any experience doing this (worked in consulting business), is still relatively youg
as I am, and probably doesn't ahve many connections, and I also don't know him very well).<p>If he would fail, I would end up not only losing money, but also time (which is the most precious), even though I probably would have fullfilled my part.
My idea was to let us both invest an initial sum of x into our company and we both wouldn't take out any salary out of it in the first months. In addition, the 3 months
revenues (let's say y, a little bigger than x) I lost from quitting my job earlier than he did (as he was still earning money at that time) are virtually added
to the sum I'm investing. In addition there is also risk of quitting the job first and creating the prototype, idea, relocating and the incubator which I would
like to weight somehow as well. But I'm not yet sure on how much this is worth. Also there is the risk that he doesn't sell anything at all. In that case I would
like to get rid of him, as he is simply wasting my time. So my idea on this part is to make a deal that if he doesn't manage to get that many customers and doesn't
generate that much revenue in a given time frame, he simply has to hand over his shares to me. In that case I could still contine business idea 1 or even consider
going further with business idea 2, depeding if there is still a chance. I would however have lost a lot of time (also explaining things to him and discussing things...).
The easiest possibility would be to only overwrite him his shares if he reaches his goal, instead of taking them from him away (from a legal view). But I don't think he
will agree with that one.<p>I was thinking of a 65:35 deal (alone moneywise it would be more like 2.2:1, let alone the imaterial things I didn't add, like the idea, risk, etc...), 
but I think it is too high. But if he manages to get us profitable by the end of year, I find it is ok as I also benefit from it, allthough I took a much higher risk than he did (also timewise).<p>Another related question. Is it common that all shareholders have to agree to sell a company or is this more uncommon?<p>What are your thoughts on this? Is there something I forgot and I should pay attention to?
======
igurari
I am presently in a very similar situation. One possibile solution suggested
to me by a lawyer friend would be to set up two companies: one jointly owned
by you and your friend, and the other owned solely by yourself.

Your company would own the code you produced to date and then license it out
to the jointly owned company. You could then build in an agreement where the
jointly owned company has the right to purchase the code for a nominal sum at
some future date if certain benchmarks are met.

This should give you the flexibility and protection you seem to want. You
could agree to move forward with your friend as a business partner, but if he
turns out to be a flop, you still have ownership over your code. At the same
time, your partner should feel confident that if he performs his part, he
won't be shortchanged.

As for the appropriate percentages, I am also currently grappling with this
issue. I haven't settled on a figure yet, although I recall reading somewhere
that the best deals are where both parties feel shortchanged.

~~~
ScottWhigham
I like that approach - very interesting. Have you actually tried it though?
I'm just wondering if this is one of those great ideas in theory things or
whether real, actual, high-quality folks are saying, "Yes" to this type of
deal.

~~~
igurari
I have yet to do this, but if I end up working with my friend, it will likely
only be under such a structure. Although it requires a more detailed and
explicit contract up front, so long as the benchmarks, time frame, and price
are reasonable and agreed upon, neither person should have any reason to
complain.

The point is that both I and my friend/co-founder will know what we own and
what we have to do, and we should both feel reasonably good about it. I won't
feel like I've given anything away, and he will probably feel like he got a
fair deal.

If he agrees at the outset and meets all the (negotiated) benchmarks, he will
have a legal right to enforce the transfer to the joint company. If he refuses
to structure the deal that way, then I will probably interpret his refusal as
a sign that he is unfit for the job and possibly even untrustworthy.

~~~
anotherguy
That's very interesting. A friend also had a similar idea. My friend/cofounder
would be working as freelance under my company and get a percentange of the
revenues he generates (maybe 30%). If a certain goal is met, he would have the
option to exchange it to a certain amount of share (exponentially increasing
maybe even to 49%).

------
webwright
Well, whatever split you take-- you'll have a vesting period (2-4 years). So,
another way to look at it is this:

After 4 years (or whatever the vesting period is), how much of a discrepancy
will there be between the total value you've created and the total value he
has created? How much discrepancy will there be in risks you've taken and the
salaries you've missed? With your 3 month head start, that'd be 51 man-months
vs. his 48 man-months.

At the end of the day, there's no formula here, and you trying to calculate in
assorted risks and values really isn't going to come up with an correct
number-- all it's going to do is give you a feeling that you went thru
appropriate motions.

But, I can say that 99 times out of a hundred, the first 3 man months of a
business are really not the most critical months... And it honestly sounds
like you're over-estimating the value you've created and the risks you've
eliminated.

Also, from the way you're describing it-- you're not looking to bring this guy
on as a partner or co-founder-- you're describing a decidedly non-partner
relationship. It sounds more like you're looking for someone who walks and
talks like an employee, but is happy to take no salary and a minority stake.

You really haven't eliminated that much risk, though you've clearly
accomplished a good amount in 3 months... But you really don't even know what
sort of business you're creating yet and whether the market wants it.

I'd go 55-45 or 60-40 with each of you having a 4 year vesting period (yours
could have a 1 year acceleration due to your head start).

~~~
anotherguy
There is definitely market potential, as the current approach is very manual,
errorprone and not in time and our solution will save the customer lot's of
time (which means money). I would say it's more complicated to sell a car to a
customer coming to your store, than selling this.

As for the discrepancy in salaries, I earned twice as much as him when I was
working. If I would have started at the same time he has started, I would be
able to invest more than twice as much I'm investing now without having less
on my bank account now. This must be worth something.

------
brianlash
I can only answer one piece of your question, and it's just a suggestion:
agree to allocate your shares over time. Set out a schedule (say, every
quarter) that you'll use to decide who deserves what portion of the equity.
Have guidelines around work expectations and performance goals, and include a
3rd party in your meetings if you need to.

That way you can closely tie compensation to performance, and there are no
surprises because each party to the agreement knows what to expect (even if
you both work with 65/35 in mind).

It sounds bizarre, but it's not so uncommon in practice. Case in point, a
company that stands out in my mind as having adopted such an approach did so
on the advisement of its legal team.

>Is it common that all shareholders have to agree to sell a company or is this
more uncommon?

My gut tells me the _need_ to sell is uncommon. Usually there's a buyout
clause in the Operating Agreement that specifies how ownership will change in
the event that one of the firm's managers leaves (or dies):
[http://www.docstoc.com/docs/294674/Sample-LLC-Operating-
Agre...](http://www.docstoc.com/docs/294674/Sample-LLC-Operating-Agreement)

~~~
anotherguy
At first I proposed a 90:10 offer with options to reach 35% but he didn't
agree with that. The current plan (to take away his shares if he doesn't meet
his goals) doens't differ much from this though.

------
Mystalic
FAR too complex - you already sound like you're demeaning someone who is going
to have co-founder as part of his title. How's it going to be three to six
months from now? Are you EVER going to see him as an equal? Because if you
don't, the entire project will collapse.

And by the way, you'd be shocked how much of a business person you'll need
even with your first idea - a person to do relations while you code, a person
to do design, UI, all of that (I'm on the business side, but I've piled on a
load of coding and non-coding skills to make sure I carry my weight with any
web start-up).

------
gunderson
If you don't plan to seek funding it doesn't matter what you do. If you do
plan to seek funding, figure out a way to make it a 50/50 split if you are
going to have a cofounder, any other arrangement will raise eyebrows and cost
you time and legal fees when you try to get funding.

~~~
anotherguy
I earned twice as much as him when I was working and quit my job and didn't
earn a salary for 3 months. These 3 months alone are worth more than he is
investing. The sum we both invest should be sufficent to get the company
running for at least 10 months without any revenues. If it turns out to be a
viable idea, we both (or at least I) can invest some more money or seek for an
external investor. I don't think a 50/50 split would be fair, as I already
proved that I could do my technical park, and he only joined afterwards and
has not yet shown or done his part.

If everything fails, there is still the option of selling the software. At
least my former company will be very interested in what I was doing.

~~~
gunderson
I don't disagree with what's fair, just saying that if you have a non 50/50
arrangement then you are probably going to have a different sense of when it's
time to cash out than he is.

Why not just make him your first employee and compensate him with incentive
stock options? He would not be a partner or a founder, but a fairly large
potential shareholder if things go well.

------
ScottWhigham
What does he want? It's fine for you to come up with in your head all of this
but does it match his expectations? He could be expecting 50/50 and want to
walk when you show him something complicated.

What have you done to protect yourself from him starting a competitor if the
two of you can't come to terms?

~~~
anotherguy
He said a 65:35 deal was ok for him.

If it turns out we are going in different directions, I think I'm going to
have a big head start on him. Business idea 1 is undoable for him. Business
idea 2 will be possible to do for him, as the software is a very much
simplified version of business idea 1 with less features.

I already completed nearly all of the software, so I could start much earlier
than he does. (He would have to get someone creating the software for him). If
he decides not to accept, he probably would also ahve to leave the incubator
which would also leave a negative annotation on him. (also if we would be both
be selling the same thing) But I don't think it will come to this and it would
also not be in my interest or his.

I haven't done anything from protecting my idea. (no NDA...)

~~~
ScottWhigham
Seems fair to me - you wanted 65/35 and he's happy with that. I might put in
clauses that would allow him to make it 60/40 if he turns out to be a miracle
worker though; nothing wrong with a little extra incentive. 60% of $30,000,000
exit is better than 65% of a $20,000,000 exit...

Did you sign the deal?

------
carl_
You're talking 65:35 of... zero right now. I'd say he gets that share if he
sticks with it (meaning you stay in business) for three years.

Additionally if you make this such a large pain point, then are they the
correct co-founder to begin with?

