untaggedThe business person will look for customers. The programmer will write the software.
The business person will devote 1/4 time (10 hours / week) for the task. The programmer will devote full-time (40 hours / week) for the task.
Each will be compensated at minimum wage for their effort. The business person will be paid $5,000 / annum, and the programmer will be paid $20,000 / annum.
One of them, say the business person, has $25,000 in a savings account, and will lend that amount to a US (Delaware, say) corporation that they co-found, at 50% equity each.
They each get paid a monthly salary from the corporate account.
They have reached this agreement because the programmer found it unfair for neither of them to be paid a salary, while programming takes considerably more effort (time) than sales.
If it works, they agree that the shareholder loan will be reimbursed from the first revenue that comes in. They discuss a rate of 20% interest (similar to what they would have obtained by getting cash from a credit card).
What if it doesn’t work and they have no sales? Suppose they move on after 12 months. How can the loan be paid back? What kind of sensible agreement could they reach?
Update
Consider this tentative arrangement just that: tentative. Feel free to propose how two people can get together to work on a startup. If they say, from the get-go, we’ll both work for free, that’s a non-starter. What kind of arrangement can they have?
One of them, say the business person, has $25,000 in a savings account, and will lend that amount to a US (Delaware, say) corporation that they co-found, at 50% equity each.
The business person is getting far too generous a deal. And don’t forget to vest the founders.
They discuss a rate of 20% interest (similar to what they would have obtained by getting cash from a credit card).
It sounds usurious. Also, you need to put equity into a company when you create it in most places. (Admittedly, some countries turn a blind eye when you say the initial capital is [cough] “in the cash register” but you’re playing with fire if you do that and the US is not one of those countries.)
What if it doesn’t work and they have no sales? Suppose they move on after 12 months. How can the loan be paid back?
It doesn’t. The whole point of having a limited liability company is so the company’s owners aren’t on the hook for the company’s debts.
What kind of sensible agreement could they reach?
The same any defaulted company loan goes through. You liquidate the company’s assets, and then return the money to creditors in order of seniority. This usually means paying the taxman first, unpaid salaries next, then outstanding debts, with shareholders keeping the balance. If money runs out during that process, then tough luck.
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