equity, funding, co-founderI’ve been involved with a product since it’s inception as the technical side of things, working with one other person who is the idea+product guy (no ability to code or do technical). We are long time friends, and it started a long time ago at this point 6 years back. It has gone from being a side project, to an idea put to use in a small local community, to the product guy quitting his day job to try and focus on it as a business, all the way up to achieving friends+family funding finally, at the 6 year mark. It’s goal is a Series A funding in 7-10 months now.
Along the way it has many slow points, mainly struggling with the concept of finding time to grow it, then once time was found, struggling with the idea of funding and viability. It has stalled at times due to lack of direction, next steps. Up until this friends+family funding it has just been the two of us working on it, both committed to its growth, but with me doing the majority of work by time simply because building the product out takes more time product phase. It has generally been considered his product, but that are partnership was one of equals. We discussed that several times, that I never expected to work for him one day, but to be his full partner.
As the development side, I’ve built everything (server, db, web app, ios app), and there is probably 100k lines of code out there to show for it. He has come up with the product design to drive it, and the core ideas which I’ve massaged into a working prototype. Along the way he has also paid me for large project sections, mainly because of the significant work needing development. Various sections might have been 100 hours of work from me over 3 months, where his product and testing side took 10-15. I charged him a very low rate as a friend, perhaps $25/hr rate for the paid projects, where I charge $100/hr market rate to my real jobs. Any given year he might have paid $2-$4k. In between paid projects I continued working and supporting and might estimate 60% was unpaid work overall, with same day response+fix time always.
We’re now 6 years in, and after a year of establishing this friends+family funding trying to determine my role in this as continued development lead. $200k in this funding. 3 others have joined in sales and business roles, who are the “friends+family” investors and now workers too. A decent valuation was placed on the company with an existing platform, idea, and audience. Investors and employees probably have about 15% total equity at this point, and the product guy effectively has the rest as the main holder of the keys. He is open to give some away to grow the team, but is still the holder. We both want me on board as the continued technical side, but are trying to figure out the details.
What is a fair way to determine the equity at this point? There is a bit of disagreement in this, which has put unease in me. Mainly because I’ve assumed and expected co-founder status going in, with 6 years under my belt. He has said he doesn’t want to use titles or terms like that, and that we’re all a team. (he still holds all the equity). So, overall factors:
Is it absurd for me to assume a cofounder entry point? While I don’t have to assume 50% founder equity, I would expect at least 40% to his 60%. Am I wrong and should be expecting a generous first-employee entry at best, since he has paid me some of the years? Since valuation is based on the entire 6 years product build, unofficial until now, doesn’t that give me something from sweat equity alone?
Crazy that you don’t have anything in writing after 6 years…
Depending on where you are and the facts of your relationship, you might have a strong argument that the two of you are accidental partners and therefore you own half of the business. More info here: https://lunsfordlawblog.wordpress.com/2011/11/07/the-accidental-business-partner/
You might also own all the code that you have written. You likely own and code you wrote and were not paid for. You might even own code that you wrote and were paid for. See: https://en.wikipedia.org/wiki/Work_for_hire
From what you wrote, it seems reasonable to call you a cofounder and for you to own a significant percentage of the business. The above two points give you good leverage for negotiating what you want.
You have several questions, and need to be better informed.
Is it absurd for me to assume a cofounder entry point?
Your expectations should be constructed around a BATNA (Best Alternative To a Negotiated Agreement). If you can’t reach agreement with him do you have a better alternative?
In an effort to reach agreement you may want a conversation with your “partner” to make clear your expectations of being a “full partner.” Your goal is to try to understand why things are different in his mind. Something like, “Hey, it seemed to me that we had talked about being full partners/equal owners a few times. Has something changed?” See what he says. Listen and ask questions. If he argues or whatever, your expectation is still valid. If he doesn’t address it then you should expect him to continue to treat you this way going forward. Act accordingly. Just be careful because a conversation like that can be emotional and it’s possible you want to avoid it.
If you are unable to reach agreement, he has paid you for development. You probably can’t take what he already has, however it’s likely you own the source code. Can you compete effectively against his company? Can you find the time/money/energy/people? Is this a viable option? Regardless, maybe form your own company and his company will be forced to either compete or acquire it. (If he ignores it, then he may owe you later because of copyright violations.) He might be more open to understanding the value of your contributions at that point - or maybe he simply doesn’t value your contributions like you do. That may continue going forward. Again, act accordingly.
Also, consider that bringing all these new people in will complicate things considerably. Will this actually work? Or will they self-destruct? All of this interest can create the illusion of success, but there is still a long road in front of you. It may be best to take a “chunk” and see where things go. Ask him to bring in funds to hire people to keep the business going and you take a back seat?
Last, he may also think he can hire anyone to “take over” your code. Offer that and remain friendly. Tell him you need a break and he should think about what you’re worth, but he needs to hire someone to cover for you. Maybe that will be easier than you think (and you are expecting too much value), or maybe he will be begging for you to come back/stay active (which is more likely). But without agreement or understanding, this is simply you vs. him. He probably doesn’t know all of the hours you put in, and you probably didn’t advertise it to him very well. (You were trying to be a “good partner” not get recognition, right? Well, this is the price…) It may help if you explained this to him, but most likely he will have to try to replace you to learn it.
You have options. Valuations are never easy. Creating a sense of fairness is difficult. Consider your options, and that should help you figure out the value of your contribution.
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