

Incorporation and stock sharing dilemma - atiw

Hi everyone,
This is my first post here.
I have been just a silent reader all this time. 
Finally I get to post something as well.
Hope this helps others as well.<p>So, let's get started.
(P.S. - I am avoiding mentioning names of stuff like university etc, since it will be very<p>embarrassing if this gets read by my future co-founder, as he doesn't know about this dilemma i am facing yet)<p>First, A little background. I graduated as a Master's in CS from a reputable university this<p>summer. I am planning to start this company that uses AI to solve some major NP complete<p>problems related to resource allocation problems. It's planned to be a software product company.<p>This has been a product of my master's thesis.
So, obviously the IP(Intellectual Property) is in both mine and my adviser's name. This idea is<p>basically an evolution of his idea, which his earlier students had been trying their hands on,<p>but it didn't quite work as well as it was supposed to be.<p>And finally, I came along and with all my magic touch (If you can believe that), we did it. I<p>started implementing from scratch and finally after one and half years or so, we got it working.
Now, this product has myriad applications and all that, but we want to focus on two, at most,<p>for now, and see where we go from there. and when i say we, i mean the company.<p>I guess we have enough information now.<p>I have two major questions for you guys.<p>1. I have to incorporate this company sometime this week, since we had a demo last Friday and it<p>went very well. Now, the users are asking for this product, so this is the right time to incorporate and start selling i guess.<p>Now, I am not sure what kind of company it has to be.
According to Ycombinator FAQs, we need to be a C-Corp. I am wondering "Is that like the common<p>requirement to accept money from any of the other investors as well? or is it just YC? ".
How about other types?  LLC? etc etc. I am not even sure what other types are out there, except these and S-corps.
How about S-Corps? I have heard about S-Corp but i am not really sure if startups qualify.<p>2. And the more important one. So, I finally had the guts to ask him (my adviser) about our<p>stock distribution as co founders of this new company.
His thoughts were the following:<p>"We make it 50-50, except since he will be continuing his full time job as a professor/head of department and I am doing all the coding full time (most of it is done already), I get a fixed salary(not yet decided) first from the revenue and then we evenly get 50-50."<p>Now, I was all happy with this for a few hours, thinking this is great. I start selling my<p>product, and apply to Ycombinator, which obviously is going to invest once they hear of me, my co founder, my company and my product. And I get to go live in bay area and share the startup experience with you guys.<p>And then i called people to talk about this and share this great news...
I go : "Hey, listen, my adviser wants to open a company with me. How cool is that? This is totally awesome. He is a genius, and 
now he wants to partner with me"<p>Too bad, I had mixed opinions from them and that got me all confused.<p>Here's the thing.
I am pretty sure he is NOT going to leave his job.
And I am the one who has coded everything in this product.
But the initial idea was his. IP is shared between both of us.<p>But if you ask me, he taught me everything related to this idea, and he has been helping me<p>through the worst of my times(I was in a coma, horrible horrible stuff happened to me,and he<p>agreed to give me a chance and guide me , believed in me, when i was almost broke...so....u<p>know...he is like...i don;t know, if you divide god into half....one half....well whatever,<p>that's another long story...maybe later)<p>He is not bringing in any coding to the company, though we always talk through all features of<p>the product and decide it. He is not an MBA, he is more like a head of dept now. He has opened 2<p>startups, he has so much more experience, he is a brilliant guy and i feel so lucky for even<p>being able to work with him. He is like one of the gods of his field. 
But we haven't decided roles specifically yet. 
And someone said that his offer of the whole 50-50 is unfair and all.<p>Now, I am confused here.
What do people do when one of the co founders is technical, but he is more like an abstract<p>adviser, still a top guy in his field in academics?
and in this case,he is not even going to work  full time for the company.
but he is like eric schmidt in some sense, that he actually manages a lot of stuff in his<p>current position (u knw, like eric was working for google and apple until recently, and like he<p>was a chairman for quite some time with google, before he switched over to google as CEO back<p>then).<p>I am not even sure at this point exactly what his role would be. 
I just know what it won't be.
Also, his name and reputation follows him.
Having him on my side is really good.<p>Just that I don't know how to make sure I don't feel like a fool later on.
Coz I have read everywhere, it's better to settle all co founders issues from the very beginning<p>and better put things on paper.<p>So, I see these as his plus points:
1. Co-inventor of the technology.
2. Great Mentor.
3. Great qualifications.
4. Experience.
5. Good contacts.
6. Highly Technical guy.<p>And the minus:
1. I am considerably younger, so getting a buddy like feeling is almost impossible.
2. I might feel like I am working alone until I get some developers as employees, which might<p>take time since we have the product ready to sell.
3. Not a coder. 
4. Not full time employee, more like a partner who runs other stuff as well.<p>I am dying to hear from you guys on this.
======
atiw
P.S. - I might have said something that led people believe he is bringing
investment too. Well, He is NOT. He is NOT investing or bringing in money of
any sorts. So more I think about it, it's more like consulting.

Now, what are your thoughts, after I told you guys this explicitly (somehow I
thought it was obvious...should have mentioned this in the minus points, now I
don't seem to be able to edit the post...anyone willing to help me with doing
that....that way whoever reads the post gets the whole scenario.)

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bdfh42
The past is a "sunk cost". Start from today. Who is doing what into the
future.

Do not undervalue a founder who can bring in investment but equally do not
over-value this attribute. Think about how you would go about compensating
another developer joining the team - how would that change the stock split -
do you need to reserve shares for future contributors.

If you must go 50:50 with a salary (when income flows) - negotiate how you can
convert salary into stock.

~~~
yalurker
The past is not a "sunk cost" given the IP issue. It sounds like the poster
just continued research the prof was already doing in his lab.

At an extreme, suppose OP just abandoned the prof and started the company
solo. Certainly the prof could later sue for his fair share. I would suspect
the University (and/or agency the research funding came from) may have some IP
rights here too.

Essentially, you can't just treat this as "the start of a business". You need
to look at it as "we invented something in the lab, and now we want to sell
it".

He can certainly negotiate, but 50/50 does not sound unreasonable. One key
component in my mind would be "how much value was created already" versus "how
much value will be added in the coming months/years".

~~~
atiw
Well, let me put it this way. I am not going to abandon my prof in any case,
both due to respect and sense of legality and righteousness. What I want is to
figure out a way to make everyone happy, future investors, and both of us. But
I agree with yalurker, in the sense that: yes, this is something invented in
the lab, only by me and my prof, and we want to sell it since it's so matured
now. The university is going to release the IP to both of us, and we will be
paying the university an agreed upon share, it's 10% as we have been told. So,
really it's more like an issue between our shares that's troubling me so much.
In a perfect world, he could have joined me in the venture and i would have
gladly made it 50-50 (hell, i would have even gone for 55-45), or maybe i
wouldn't have told my peers this and never would have been asking this
question anyways, both to myself and to all of you. If only it was a perfect
world....

I hope somehow we get close enough to the magic number, which would make
everyone happy.

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jacquesm
c-corps are fine, but I think you have to solve your other issue first.

50/50 means a 50/50 commitment.

In the situation you sketch it's more like 90/10, after all it's free money to
your adviser.

I highly doubt a VC would invest in a company that has 50% deadwood on board
from day one.

See the 50/50 as an opening offer, now the negotiations begin. You're young,
he can't do it without you but you have plenty of time and energy to go and do
something else, obviously you've got talent.

remeber: everything comes to those who wait, negotiating under pressure is the
worst you can do, you have to get in to the mindset that it can take as long
as you want, best to not do any deal than to do a bad one.

