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How to decide how to share equity between 2 people for a new startup?

My friend and I are planning to do an incorporation soon for a idea we have. It’s not my idea to begin with (currently I’m just doing a prototype for that person for some money), but that person is a business person and won’t be doing any coding overall. I am the only one that will be doing all the dev work and dev research (I may get some help later by paying money and not equity), plus some of the business things like presentations, forms, marketing. The idea involves making a web app, android app and iOS app eventually, and uses more complex things like AI and machine learning. I also consider myself valuable because I have connections/friends to lawyers and a VC if I need any mentoring.

Based on all these, some people I talked to pretty much say I should get more than 50% equity, since the devs will be putting in more work upfront at least in the beginning to make the product. But what are some good suggestions for how to split it.
When the other person first suggested we work together and incorporate, they said 50/50, but now I think to be fair based on effort going to be put in it, it shouldn’t be that.

Does anyone have experience with this sort of stuff?

Answer 8806

According to my below analysis at this site, the answer is:

59% you
41% your partner

I referred to you as Founder 2 and based the inputs on what I interpreted from your description in the OP. Feel free to tweak the model to your liking. This model isn't necessarily the definitive answer as much as a starting point for negotiation. But it might be where you wind up based on the facts that it is impartial, quantitative and objective inasmuch as it is based on actual deals in the market place AFAIK.

http://foundrs.com

http://foundrs.com

Answer 9578

I’ll speak a bit to the equity, and first I’d like to share a story:

My experience is that partnerships are easy to create and difficult to end. I have wasted a lot of energy fretting about one of my first partnerships, as I created a business with my best friend and we made a few classic mistakes:

  1. we had no SIGNED operating agreement
  2. we had no role or responsibilities defined
  3. we had a different vision and values

Here is what happened.

We worked hard and sweated it out and after roughly 2 years we started to make some money. The trouble started when we had a different vision of the future. Vision/Values are a huge part of my DNA and in my experience when we didn’t have the same Vision/Values, our partnership started to sail for a rocky cliff.

We spent money differently, we wanted to hire differently, we saw the company differently. Different is good, but the tension wasn’t healthy, it was hurting our relationship.

As a backdrop, our partnership was set up as a 60/40 partnership, of which I was the majority partner owner, but since we had failed to document that in writing, the decisions were being made 50/50.

This drove me a bit crazy, not because I wanted the power, but because this was our verbal agreement when we first started the company, I knew that sometimes we would have to venture into unchartered territory and not necessarily agree. This 50/50 decision-making structure impacted our trust in each other as partners and make for a rocky road ahead.

FYI: There are 4 ways to make decision, and basically this was the method of consensus, and in my experience consensus only works when deciding where to go for lunch.

So back to your question of how much equity do you deserve? In my mind the lion share should go to the person taking the risk and doing the work. The calculator above takes zero account into capital, which in my experience is flawed. I also believe and know that it takes a lot of tenacity and perseverance to get a company or product off the ground and if there is a partner that can sell, market and get and keep customers, especially in the beginning it’s extremely valuable. There are a ton of great products that without sales, marketing and traction sit unsold.

In the end, I bought my partner out, signed up for a bunch of debt and worked like hell to pay it off (early). It was the right move and in hindsight, I wished we would have really been aligned on vision, values, roles/responsibilities and the operating agreement - who knows where we could or would have gone together. It sure would have helped me avoid a lot of heartache.

Oh. We are still best friends. Parting ways saved our friendship, and that is the most important thing.

Answer 8811

The amount of equity you should get depends on how much risk you take. He is paying you to build a prototype so he takes the risk of losing some money and you are building it and your getting paid (some at least). So why should you get at least 50%?

Also if you do not know what you business man partner is doing you should just ask him what he is doing and planning to do. Maybe you will get a better image of what potential tasks he will do what you can’t or won’t. You will build an awesome prototype but if nobody sells the idea or makes traction it will be worthless.

I’d say write down all the efforts you and your partner put in (hours, cash & equipment) and just count it up and make an agreement on what percentage you both find fair.

Answer 8815

Life comes down to Risk and Impact.

How much are you risking, and what will your impact be?

Ask the same question about your partner.

You write about what you will do, but you don’t mention their risk or their impact. Will they contribute money that might pay your wage? Will they help sell? Who created the idea?

50/50 or 60/40 or 90/10, whatever you agree on, be happy before proceeding further. Lawyers will profit if either of you two try to re-write history.

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