tech-company, equitySo basically we have a very complicated situation so I apologize in advance for the long post.
I’m gonna use (fictional) names in the post because it’s gonna be a lot easier to understand the story than if I’d use names like person 1, person 2, etc.
Let me just say that this is an IT startup and that the product of it is a web application which is supposed to greatly simplify the workflow and improve the profits of the companies who do business in our target’s industry.
At the very beginning Barry approached John with the idea of making this platform because John has some connections and experience in the target’s industry. John told Barry that the idea he presented to him already exists so he refined it so that we have a unique product. They both don’t know anything about programming so John found Tim and me (we are computer science students) through a mutual friend. So we set a meeting and unfortunately at the end only Barry and I were able to be there. Tim told me to speak on his behalf and I assumed that Barry also had the same permission from John to speak on his behalf. Barry told us their idea and because he is a (business management) student himself and he/they can’t pay for our work, we reached an agreement that we would be “equal partners” in this project. By that we thought that Tim and me would have 50%, the same as them. And the fact that we haven’t discussed the specifics of how the equity would be divided turned out to be a major error. Anyway, we agreed that we’d work on the product and that we’d regularly update them on our progress and that when we’d have the most important features implemented that we would call for a meeting where we’d present the application. The deal/plan was that Barry would pitch the product to an investor he knows and that John would bring the first users from the project’s target industry on the site because he has connections in it.
Approximately a few weeks later they brought Alison on board without asking us prior to it what was our opinion on the matter. They said that they don’t know the law very well and that she works in a big oil company in the HR division and that she could help us with her experience in marketing and financial matters. After three months of programming (just to make clear, that wasn’t three months of full time programming, we had college obligations after all so it was like a day or two of two-three hours programming on it and then the third day we’d spend 7-10 hours on it) we finally implemented what was asked of us (the backend was almost done, but the front-end needed to be worked on some more before we could actually launch the product) so we (as we’d had agreed to before) called for the meeting. Unfortunately Barry couldn’t be there because he is studying abroad and he wasn’t in the country at the moment.
So we showed our product to John and Alison (they didn’t say how they liked it explicitly, but John said that we should just make some tiny changes so I guess he/they were pleased with the product). And then came the bombshell. Alison told us that they had already separated from Barry and they are moving forward with the project without him and that they don’t know if Barry is gonna go forward alone with the project. She also revealed to us that Barry conned her out of her equity (she didn’t give us the specifics), that she wasn’t even aware that we even existed “until just a short time ago” and that she has no knowledge of any deal that we had already made with Barry. How was she able to split the equity with Barry and John in the first place without asking who’s gonna make the entire product for them and how are those people gonna be compensated is beyond me (it’s obvious that she is lying). That’s basically the summary of that meeting. We then talked with Barry and he (of course) said that everything they said was not true and that he isn’t guilty of anything.
After that we were basically left with a few choices, two of them being - 1. renegotiate and resume working on the project with Barry, or 2. do the same with Alison and John. We contacted both of them to assess who is lying and who is serious about this project. The negotiations with Barry aren’t relevant for this question so I won’t write about them. Anyway, we contacted John and Alison and told them that if they want our code, our full time commitment to the project in the future (because someone is gonna have to implement new features and maintain and worry about the servers and the code and oversee the whole eventual IT department when the firm is gonna be founded) that we (Tim and me) want 50% of the equity (because that was our original deal and we wouldn’t have even considered entering the project in the first place if they offered any less than that to be honest because they couldn’t pay us in any other way and we knew that we’d have to spend an enormous amount of time to code something as big as that). They just replied that our code isn’t worth for them to give us equity. To be clear, their sentence implied that the code wasn’t worth not only for 50% of the equity, but that it isn’t worth for any equity at all. It was clear from their response that they thought they’d give us something like 5% equity or completely pay us some measly amount for the code. If they had the kind of money that is needed to pay for such a big project in the first place I think that they would have said so in the first meeting and that then Barry wouldn’t have had offered us equal equity (and if they had that kind of money they also could have hired a professional firm, not us). We think that they thought we are idiots and we also think that to ask 50% in this case is more than realistic.
I mean, John polished that idea with Barry so it even isn’t 100% his idea and he has some (unconfirmed) connections in the target’s industry, but if his idea/our product is as good as he thinks it is then those connections are irrelevant because they would come on our site regardless. Alison on the other hand came later into the project and she is supposed to make the business plan (which we haven’t seen and we are very suspicious if it even exists on paper) and everything along with it (marketing, financials…), pitch the project to potential investors, etc. So from our point of view asking 50% is very realistic. I don’t know how they divided their equity in their “new” project, and if we joined them I don’t care how they would divide their 50%, I’d say that 35% for Alison and 15% for John (or even 40-10) sounds fair. I’d like your opinions now, are we asking too much or are we being played for fools like we think that we are and how many percentage of the equity do you think Alison and John deserve. And I’m really sorry for making such a long post, but it was needed in order to accurately tell the story (because this is like some bad soap opera lol).
All that it seems to me that there was a lot of verbal agreement, and in the UK, in order for a verbal agreement to be binding there need to be both an agreement on the services to be performed and an agreement was reached on remuneration for this service. see this site for example
From multiple places I've read, idea comes easily and goes easily, actual implementation is what really matters. Since there was a breach of what was originally agreed, the programers should call it off and not hand over the sofware, and later launch it themselves.
There is a very good book called 'Slicing Pie' by Mike Moyer which goes into a lot of detail about how to split up the equity in startups. It breaks it down step by step and even explains different ways to structure an employee pool (how your startup will hire new talent).
It basically comes down to whose adding value to the startup. Value can be defined as capital and labor. It's a quick read and I suggest having your other founders, and anyone else adding value/ might have an equity stake in your company to give it a read!
To answer your question directly, 50% sounds sound fair to me. I’d evaluate that in terms of how much time and money everyone has invested.
Having said that, I wouldn’t want to be in business them. And I take it that working with the other guy doesn’t work. So I would probably require them to flat out buy the code, based on some reasonable rate. If they complain, tell them to get a loan.
You have to watch out for Tax liability. If I recall correctly, you can assign a share to someone, and whilst the dividend may be zero as the company grows that person may be immediately liable for tax on the odd half a million or whatever amount represents the increased worth.
Accept paper with eyes wide open / get the advice of a professional.
I thinks its quite straight forward….the programmers should, keep the code, approach a marketing and finance person, offer them some equity share and set up a crowd funding site to raise capital to kick start the project.
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