equity, partnership, co-founderI’ve built an audience on social media with roughly 100,000 followers. I’ve been able to generate $80k-$100k a year in profit from them. I’m looking to build a platform outside of social media. He’s a full-stack developer and I’m a front-end developer/designer. I’ll also be putting in $30k-$50k for inventory.
Should it be a 50/50 split?
I have answered this sort of question here: https://startups.stackexchange.com/questions/9322/splitting-equity-between-founders/9323#9323 and there are quite a few materials online that would help explain, but my suggestion is:
Determine the potential value of your business at the moment.
Based on that number see what your money buys you and determine the worth of free work on each of you (if you had a salary) and how much value that persons work adds to the company.
Let’s say your company is worth 100k, you put in 50k that should buy you 50% now for the rest let’s say your contributions are equal 50/50, then split he remainder and you get 75% he gets 25%. If the co-founders input is crucial and without it there’d be no business consider a bigger share for him.
The thing is, noone can tell you how much equity you should give/get, in the end it’s all up to communication and compromises.. You should never however undervalue a developer and have him a share that keeps him interested and motivated. If his share worth per year is equal to what he’d make working regularly, he might..
There are a number of factors that need to be examined when splitting equity and I will tackle them here in no particular order.
1. How important is each persons contribution to the business?
In this case with a full stack and a front end developer it seems that you both offer critical technical roles to the business. The reason I start with this is that you need to decide first wether each person is indispensable to the company, if that is the case then you can more forward with the mindset of making sure every critical person feels satisfied with their split.
2. Who is investing capital?
In this case it is you at around 30-50k. So if you think this company would be in a position to get a seed funding round at around 500k valuation from investors, then it is reasonable to assume that the 50k investment would be worth 10% of a seed companies valuation. Therefore this would bring the split down to 55/45 in favour of you.
(50/50 down 10% is 45/45, then add the 10% to your side)
3. Is anyone taking a salary from the company?
Let's say one of you is taking $100k / year in salary. That is 20% of your 500k valuation and therefore the split (all else withheld) would be 60/40 in favour of the person not taking a salary.
(Using the same calculation as above)
4. Who's idea is it?
Be very careful with this one! In my opinion this is the least important of all of these aspects. For more information about how worthless an "idea" is pleases see the following link...
What is my business idea worth?
I hope this is helpful. Equity is a hard conversation to have but going into it with a logical layout of contributions can make it much easier.
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