partnership, web-apps, ownership, profit-sharingWe are two partners who equally own and run a web app. Until now (5 years) we were happy with a 50-50 profit sharing.
Lately the app got some more interest and we’re considering another development round. He is unable to contribute any longer so I’ll be doing everything, and this is not likely to change.
I’ll be working on the app with a paid team and we’ll need the funds for proper development. Our only income source is the app itself, no investments.
To make life easy and nice, my half is going to equally spread among the dev team I’m part of. Obviously it’s not reasonable that my partner will keep all of his 50% in this situation. But his contribution was enormous - he is the one that thought of the idea, and he’s invested huge amount of high quality work to bring it to where it is today.
What are the common adjustment options in such situations?
We’re looking for a solution that will be fair and pleasant for everyone involved.
I see there being three main options:
Buy out his share of the company
Not sure of the structure of your business or whether you have a formal agreement between you as co-founders, so this could take many forms. You buy his share for what you both consider a fair price. This could be anything from $0 upwards.
Reduce his percentage
If he can no longer contribute to the business going forward, you can negotiate a reduction in his percentage that reflects his new ‘role’ in the business. This may mean something like his 50% share becomes 5 or 10%. It recognises his involvement in starting the business but also recognises that he is no longer investing in the business.
Agree an investment rate
Rather than make any changes to the structure of your business, have an agreement where a set percentage is invested in to growing the business. For example, for paying the new development team. So, you may agree a set proportion out of each of your 50% share goes towards growth. If circumstances do change in the future and he becomes available to work on the project again, nothing really changes other than you won’t need to outsource as much (perhaps).
It is a tricky time, but there are a few different ways you can approach it. Lots of different stories shared in this thread too https://news.ycombinator.com/item?id=10586258
To make life easy and nice, my half is going to equally spread among the dev team I’m part of. Obviously it’s not reasonable that my partner will keep all of his 50% in this situation.
This doesn’t make sense to me. Without any other changes, the two of you should be splitting profits after all expenses. Dev team salaries are expenses. Your half shouldn’t be covering that.
One option is for you to become an employee and take a salary in addition to your share of the profits. This way, you get paid for the work you are doing, and your partner still gets a share of profits for not doing any new work.
Depending on the country you’re in, you can change the share structure and also the type of share you, your team and your other co-creator hold. First, a good deal is only a good deal if both people agree that is the case. So there must be negotiation (I’m stating the obvious up front). Now, going forward if you have any further investment due to your efforts running the company, then your share should he protected and the other founder is diluted. This is fair going forward. Also, you can change the share structure (if this benefits you) from ownership shares to dividend shares, either for the other founder or actually, for your team. These shares can have a nominal value and do not form part of the ownership structure and have no voting rights, but receive dividends. If your co-founder contributes no more but both of you feel he deserves something forever after, change a proportion of the ownership/voting shares into dividend-only ones. If you’re going to effectively become the CEO, you want the freedom to run the company with the board and not have such a large (50%) share and vote sitting with one sole person outside the company.
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