equity, salaryI’m currently working on a start-up, and while we’re about 30% progressed into the “releasable” state of the product, we have one client using it.
We are two in this, and we started it together, being 50%-50%. I am the sole developer, and I’m working a day job, so the development time I get is limited.
I am asked to leave my day job, and that he “hires” me (for more money I’m currently making at the moment). This also means I cannot keep 50% of the company. He says he would rather give me 50% of profits, but own 0%, and that scares me.
What is the general trade-off here? Is it ok to own a part and being paid a salary? How to avoid getting ripped off?
Profits without ownership leaves you without the control that was likely part of the motivation for starting the company in the first place, however, that is personal preference. What he is proposing could be very fair if you are ok with having him as your boss. If you would rather not have a boss or you are concerned that he might sell leaving you with a different boss, stick it out at the lower pay.
Either way, talk to a lawyer. No partnership should be without a document stating the terms of that partnership. The lawyer may use the same form you could find online, but if anything goes wrong you have him available to help you through it. It is kind of like insurance. Besides he will help you understand what you are getting yourself into.
As always, the caveat is that I do not know the full details and am not a lawyer.
So currently you own 50% of a business. That share has some value, because you have some revenue and some IP. Your partner cannot take that off you. It sounds like your partner is planning to put some money into the business, in order to guarantee you a salary, and in return wants you to hand over your share of the business. I would have thought that was unlikely to be what you want because you lose all control. He could sell the business to someone else, who could make you redundant for instance.
Some points 1) Disenfranchising you as lead dev is likely to demotivate you, and is not a great plan on his part. 2) Is employment with him as secure as the emplyment you have already?
Perhaps what he feels is that if he puts some money in to guarantee you a salary then he has taken more of the financial risk and deserves a return. you may in turn that this under values your contribution. The part where he is confused is that he wants to offer you 50% of the profits, by some mechanism (bonus?).
Perhaps you have some cash you would like to invest?
Perhaps you could suggest an alternative structure. You could incorporate the business owning 50% of the shares each. Then you could work for the business as an employee. Your partners investment now could take lots of forms. He could lend the company money to progress, and receive interest for instance. He could have an agreement that his investment is repaid before any dividend is passed to other shareholders. I don’t see why you would need to give up your shareholding to do this.
Ask yourself how much the business could be worth. Imagine that it’s resale value could be 10 times the profit in a few years. You could be signing that away.
You are making some revenue, which means you already have tax issues, which means you should be looking for an accountant. You should go to them first for advice about structure. If you think the business could be worth a lot one day you may want to consider an accountant big enough to have a corporate finance specialist
I’m going to be really blunt and sceptic here. If your partner doesn’t value your work and input enough to give you ownership, that is a big red flag, regardless of current conundrum.
I would suggest valuing the company with whatever numbers (customers or lines of code) you have right now. Then make a plan to pay you for, say, 6 months. See how much money you need and give your partner the proportional percentage. If you really believe in your project, consider taking a considerable pay cut.
For example, you value your company at $1,000,000 and say you need $30,000 to survive for 6 months, then your partner gets 3% extra. 53% for him and 47% for you. When the 6 months are up, recalculate, this will give you the chance to make your company more valuable.
I leave you with the equity calculator, it can help you know what to take into account:
http://foundrs.com/
P.S. I would really reconsidering partnering with somebody who is willing to do this, that’s a hard pill to swallow I know.
All content is licensed under CC BY-SA 3.0.