legal, co-founder, business-structure, partnersIf people have been reading my questions, it sounds like I distrust my cofounder. I don’t.
What I am trying to do is get a feel how things are done with someone who I have only met once in my life and we only got hooked up by angelist.co.
So on the one hand he can be a scammer trying to raise funds and then run off somewhere or he can be a legitimate person who it trying to avoid paying legal fees and incorporating fees until the start up starts bringing in some money.
The startup is split 60/40 with he having the 60% so he’d be expected to pay for the fees and not I. I am to put more time in it.
So does anyone have a good rule of thumb how much trust do you need for a cofounder in order to work with him?
In short, i’ll give you the following advice…
You ask, “how much trust is sufficient for a cofounder”? I say it goes way beyond trust. I’ve been involved in quite a number of start-ups over the years and have witnessed quite a bit. I assure you though, trust is not the only item that you want to look at… For example: how engaged is this cofounder of yours? Will you be putting in the 70+ hours a week, while he’s putting in only 40? How is your cofounders decision making? Does he crack under pressure? Does he fall into the “analysis paralysis” mode and afraid to move forward? Personally, I wouldn’t venture into anything with someone that I didn’t know well. You may find that you both get along great, but then find out what his true colors are like…
Suggestion - if this is something that is already happening (whereas, he’s the official cofounder) - be sure to get as much in writing as possible. You need to state specifics of positions/responsibilies/power of decision, etc.
Also, how can you say you ‘trust’ this guy only after meeting him once in your life? You really don’t know anything about this guy and i think you’re rushing into this without more research.
As far as him owning 60% and you own 40%, so he could pay for the ‘fees’ - what fees are you referring? How exactly is the business being formed? Is the product patented/provisional patent? Just because he owns more of the equity doesn’t necessarily mean that he is expected to pay for the fees and not you. If this is just a general partnership and not a separate entity, then you will be responsible for quite a bit - legally if someone sued the company.
When you state that you’re expecting the cofounder that owns 60% of the startup, what exactly is he paying? You would be doing all the work (what type of work?).
You say he will help raise funds, but have you completed a business plan and financials yet? Reason i ask, is why do you need money if he’s already putting money into the company? Do you have a customer base? Typically you don’t want to consider raising funds until you’ve shown revenue with your company. You also want to be self sufficient, but as you grow, if you had invoices in hand and/or documented and verified orders, THEN it would make sense to go for additional investors, since you’d now have something of interest to them and they won’t take majority of your equity away quicker. Remember, if you have only an idea for a business with no real substance other than an idea, some marketing figures, etc. The investors will demand 51-90% of the ownership, based on the calculated risk, the time their money is tied up and many other factors.
Here’s the last question… If you guys are ‘partners’ and you’re doing all the work, and he’s only putting in some money, yet he starts off with 60%… This sounds whacky to me… If you put in 100 hours of work and he only pays for $1000 for the formation of the business, business cards and a couple other little things, then he gets the additional 20% of the company, whereas you’re working for about $10/hour (based on his initial cost of $1k - just as a figure to give you an idea of my thought process here) - so in essence, you’re both putting in equal money (or equivalency of time), yet he gets 60% and you 40%?
I suggest, you seriously reconsider moving so quickly, do more research. Get to know this potential partner on a better basis. I just fear that you’re put in all this effort and it really could backfire and set you back. You need help from a seasoned business person.
very best,
My overall feeling with this partner is that they are “rolling the dice” on multiple projects by leveraging free labor from individuals such as yourself. Thus, you take all of the risk (i.e. do all the work where time=money) and the partner handles trivial expenses such as incorporation, if/when it ever becomes necessary.
I understand the partner’s desire to maintain controlling interest (unbreakable ties often result in the dissolution of the company) but in this situation 60/40 split in their favor for unknown contributions seems like an unfair deal. At the end of the day, the partner owns everything, controls everything, and can dilute your equity at will. (Your defense against this is an clear operating agreement, which will necessarily cost many thousands of dollars in legal fees to create and additionally require you to engage experienced legal counsel to make sure everything checks out, and advise you of hidden pitfalls.)
Where a 60/40 split in their favor would make sense was if they had capital committed (as in in the bank where you can see it) to devote to marketing the product and for legal expenses. (i.e. if the plan is to use your labor to subsequently try to raise venture capital for a bootstrap company, it is almost certain to fail. If the plan is to crowdfund to raise capital, be aware that most crowdfunding campaigns will themselves need to be backed by a marketing campaign to be successful.)
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