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

[sneaky]

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?

Thanks

[Freelancier]

Never 50/50. Someone ALWAYS has to have final say or the company can seize up and not function at all if the partners aren't in complete agreement.

Ignore the corporate filing end of it for the moment. What you're talking about is: how do we set up our partnership so that things are equitable. And the best person to ask is your partner. This is a negotiation between the two of you, so start negotiating. If you can't get this negotiated, no reason to go further, because it only gets harder as you get any level of success.

[sneaky]

That's what I figured. But what are some strategies for calculating equity. Is it right to say that, the idea is worthless at this point, and that the equity should be divided based on what exact contributions and value we can bring in. So even though its not my idea, if I will be doing more work and can bring in mentoring help from vc and lawyers, plus some of the business work, and the other person just business work, Is it say fair to say I can bring more contributions and thus should get like 60%?

[BNB]

If it were my idea and I was looking to bring you onboard, I surely wouldn't be offering you a majority stake.

This is, unfortunately, a question that cannot be answered. It may be a scenario where this guy has an idea but wants little to do with it day to day and is open to a minority share for guiding the project. But that's rare.

[Freelancier]

Some people think their equity should be based on contributed value; others think it should be commensurate with actual risk (as in who's putting up the money?).

I think that it depends more on how you value the other person, not so much how you value yourself. And if you don't value them highly enough, couldn't you do it without them, and -- if not -- why not? And if you can't do it without them, maybe you need to factor that into your valuation.

[sneaky]

Most places I seen, say to not do 50/50 like this

DO NOT Split Equity Between Founders Equally - Business Insider (http://www.businessinsider.com/splitting-startup-equity-for-your-piece-of-the-pie-2010-11)

Also the other person may be the original idea person, but compared to the amount of value/contribution I can bring, its not that much they will be putting in. Since I will be building the actual product without the other person, plus be involved with the business planning, presentations, and marketing, it doesn't seem fair to the dev to get less than 50. Plus, this is just he original idea, theres strong chances that we will pivot multiple times in the future, where we both are making decisions, and thus both become the new idea person. It would probably require more effort again for a dev to make the new pivoted product. Based on all these, wouldn't it be fair if the dev person would get more than 50, as in general theres more for this dev to contribute.

Is this thinking logical?

[sneaky]

Some people think their equity should be based on contributed value; others think it should be commensurate with actual risk (as in who's putting up the money?).

I think that it depends more on how you value the other person, not so much how you value yourself. And if you don't value them highly enough, couldn't you do it without them, and -- if not -- why not? And if you can't do it without them, maybe you need to factor that into your valuation.

I could probably do it without them, but the other person holds a copyright of the idea. (although not sure how useful it is). I'm not sure how valuable they are, but it feels like what they can do, I can either do it too with more effort or ask friends for advice. But it would be immoral of me to just abandon and do the same idea myself. So I would have to stick with them, however I would prefer a equity split based on contribution as the other person highly values my contributions.

[Harold Mansfield]

Anytime I hear a partnership of 2 people and one is under the impression that their contribution and sweat equity is worth more than the other guy's, I question whether these 2 people should be going into business together in the first place.

With the exception of significant financial investment of one partner over the other, this is a partnership disaster waiting to happen.
If you don't feel your partner's sweat equity and value is just as important as yours, you shouldn't be going into business with him. Starting a business is already hard enough without the underlying resentment between the principle people involved because if you get lucky and have any kind of success, you will be constantly fighting and it will ruin the company.

in a partnership there are going to be instances where one person picks up the slack for the shortcomings ( whether that be time or knowledge) of the other. You should know and enough about the partnership you are about to get into to understand what your commitment will be. Both people can't be doing the exact same thing. It should be 2 people who each bring something important to the table and you understand and accept your role as part of the partnership.

If you feel that you're working with someone where you need to itemize and nit pick every single action of the role you agree to and compare it to their contribution and deem it less valuable before you even get started, it's not going to work. I say this from experience and just common sense. You can't go into business with people that you don't trust or respect.

JMO of course.

[sneaky]

Anytime I hear a partnership of 2 people and one is under the impression that their contribution and sweat equity is worth more than the other guy's, I question whether these 2 people should be going into business together in the first place.

With the exception of significant financial investment of one partner over the other, this is a partnership disaster waiting to happen.
If you don't feel your partner's sweat equity and value is just as important as yours, you shouldn't be going into business with him. Starting a business is already hard enough without the underlying resentment between the principle people involved because if you get lucky and have any kind of success, you will be constantly fighting and it will ruin the company.

in a partnership there are going to be instances where one person picks up the slack for the shortcomings ( whether that be time or knowledge) of the other. You should know and enough about the partnership you are about to get into to understand what your commitment will be. Both people can't be doing the exact same thing. It should be 2 people who each bring something important to the table and you understand and accept your role as part of the partnership.

If you feel that you're working with someone where you need to itemize and nit pick every single action of the role you agree to and compare it to their contribution and deem it less valuable before you even get started, it's not going to work. I say this from experience and just common sense. You can't go into business with people that you don't trust or respect.

JMO of course.

I do respect the other person, it's just that I don't think their overall efforts (what they can do to their abilities) is equal to the effort I would do overall. As a dev, people tell me, once you commit, you would need to spend lots of hours every day like 6-8 to finish the product. Also to get another technical co-founder to bounce ideas/fixes off each other. As the devs work constantly everyday, there will be times where we feel, is the business person putting up this much work each day. In the end, the product will have been made by the dev, plus the dev helps with the business plan, all the business and marketing won't be done solo by the business person anyways. Also in this case no one is a successful entrepreneur, or has actual experience, and no significant money was invested. It will just be a ton of work done alone by the dev, and then business and marketing decisions done as a team.

What should I recommend as a equity split, I don't feel like my efforts is worth <= 50%, as I can bring in some serious contributions.

[Harold Mansfield]

I do respect the other person, it's just that I don't think their overall efforts (what they can do to their abilities) is equal to the effort I would do overall. As a dev, people tell me, once you commit, you would need to spend lots of hours every day like 6-8 to finish the product. Also to get another technical co-founder to bounce ideas/fixes off each other. As the devs work constantly everyday, there will be times where we feel, is the business person putting up this much work each day. In the end, the product will have been made by the dev, plus the dev helps with the business plan, all the business and marketing won't be done solo by the business person anyways. Also in this case no one is a successful entrepreneur, or has actual experience, and no significant money was invested. It will just be a ton of work done alone by the dev, and then business and marketing decisions done as a team.

What should I recommend as a equity split, I don't feel like my efforts is worth <= 50%, as I can bring in some serious contributions.

Honestly, either buy the guy out, or start your own thing. If you feel like you're the heartbeat of this thing, and are completely invaluable over the other guy, then you don't need to be in a partnership. Get your own ideas and do your own thing.

Here's the question: It's his idea. If he had the money couldn't he just hire someone to do your job? I mean, seriously, it's his thing...why does he need you?

But to think you're going to work his idea and then take over majority share just because you're doing the job you agreed to do to get it off the ground is ridiculous.

JMO of course, but I'm smack dab in the middle of 2 different opportunities. One is a partnership that I've been invited to be a part of. I go into it knowing what my contribution will be and understanding that it will take different talents from all of us to make it successful. I already know what the other people bring to the table and it was all considered before I agreed. So I go into it willing to do what it takes to make it successful. Not nickle and diming because my role my be more technical or time consuming than other duties. They're all important and one can't be successful without the other.


The other is solely mine. Should I decide to invite someone on board, they would obviously need to bring something to the table that I need, and their stake will be spelled out from the beginning. If they agree to terms I'll expect them to follow through as agreed.

Doesn't sound like you don't agree with the terms that you previously agreed to now that you see how much work starting a business is and your role in general. So discuss it. If he doesn't agree, then it's time to move on.

I just think expecting a majority stake in someone elses idea without a financial investment is out of the question. Developers can be hired. I'd rather take out a loan and hire a developer to follow my direction and keep 100%, than to give up a majority stake based on programming work alone that anyone can do.

[sneaky]

Honestly, either buy the guy out, or start your own thing. If you feel like you're the heartbeat of this thing, and are completely invaluable over the other guy, then you don't need to be in a partnership. Get your own ideas and do your own thing.

Here's the question: It's his idea. If he had the money couldn't he just hire someone to do your job? I mean, seriously, it's his thing...why does he need you?

But to think you're going to work his idea and then take over majority share just because you're doing the job you agreed to do to get it off the ground is ridiculous.

The other person could, but has already seen how valuable I am, and would be too much effort or expensive for them to find another. Plus we have already been through a lot and stuff and to just quit and go separate ways is kinda hard and mean, plus I don't really want to leave and do this idea myself as it wasn't my idea to start off with. If I do it, it should be with the other person. However, we don't know how much of the "current" idea we will actually end up using.

The other person brought the original concept with some features, but once I joined, I added my share of idea contributions to enhance the idea and added real monitization strategies, rather ways to make more money. We're bound to change things or come up with new pivots together anyways, so really my ideas will be heavily mixed in. So it won't be the other person's full idea. Considering all that, I am pretty sure, the dev should still get over 50%, but I'm trying to figure out how much.

[sneaky]

Honestly, either buy the guy out, or start your own thing. If you feel like you're the heartbeat of this thing, and are completely invaluable over the other guy, then you don't need to be in a partnership. Get your own ideas and do your own thing.

Here's the question: It's his idea. If he had the money couldn't he just hire someone to do your job? I mean, seriously, it's his thing...why does he need you?

But to think you're going to work his idea and then take over majority share just because you're doing the job you agreed to do to get it off the ground is ridiculous.

JMO of course, but I'm smack dab in the middle of 2 different opportunities. One is a partnership that I've been invited to be a part of. I go into it knowing what my contribution will be and understanding that it will take different talents from all of us to make it successful. I already know what the other people bring to the table and it was all considered before I agreed. So I go into it willing to do what it takes to make it successful. Not nickle and diming because my role my be more technical or time consuming than other duties. They're all important and one can't be successful without the other.


The other is solely mine. Should I decide to invite someone on board, they would obviously need to bring something to the table that I need, and their stake will be spelled out from the beginning. If they agree to terms I'll expect them to follow through as agreed.

Doesn't sound like you don't agree with the terms that you previously agreed to now that you see how much work starting a business is and your role in general. So discuss it. If he doesn't agree, then it's time to move on.

I just think expecting a majority stake in someone elses idea without a financial investment is out of the question. Developers can be hired. I'd rather take out a loan and hire a developer to follow my direction and keep 100%, than to give up a majority stake based on programming work alone that anyone can do.

I feel like, if I knew that the other person can do some serious business skills, has lots of experience, is able to bring in customers, has connections, making their overall contribution valuable, and has a solid business plan without any of my contributions in ideas, such that we would just stick to that idea throughout, then yes I would think its fair for the dev to do the tech stuff and other things, and split 50/50. It would feel like both sides are doing a considerable amount of work.

[Harold Mansfield]

Considering all that, I am pretty sure, the dev should still get over 50%, but I'm trying to figure out how much.

I completely disagree. This guy invited you to his thing and now you're trying to take it over because you've come up with some additional ideas. That is not the mentality of an honest partnership with both parties respect each others contribution. A partnership is supposed to be each person bringing something to the table. It's supposed to compliment each other. As a partner you're supposed to come up with ideas that are beneficial to it's success. That's your job as an owner. It's not a score keeping thing where you get rewarded based on who had what idea.

Honestly, the more you say, the more I think it's destined for failure. Either you trust and respect this guy as a partner and are willing to do what it takes or you don't.
There is no in between.

[sneaky]

I completely disagree. This guy invited you to his thing and now you're trying to take it over because you've come up with some additional ideas. That is not the mentality of an honest partnership with both parties respect each others contribution. A partnership is supposed to be each person bringing something to the table. It's supposed to compliment each other. As a partner you're supposed to come up with ideas that are beneficial to it's success. That's your job as an owner. It's not a score keeping thing where you get rewarded based on who had what idea.

Honestly, the more you say, the more I think it's destined for failure. Either you trust and respect this guy as a partner and are willing to do what it takes or you don't.
There is no in between.

So then what if you go into a partnership, starting with their idea, taking on 50%, add in all your ideas and experience to really make it viable, then finish the whole product, helped with all business decisions (always discussing together), both presented in all presentations and pitches, helped with marketing, got lots of mentoring help from your experienced friends, and noticed the other business person has done only some of the business work, i.e. the overall effort from them was much lower than all the work you did. Suppose the idea was successful, and now, the other person owns half of all profit. Where, most of the profit was because of the work you did. You would still be fine with the 50/50 split, or would have wanted to have a little bit more from the start because you knew you would be putting in more time and actual product contributions.

Ive spoken to some tech lawyers before who have been in both dev and business sides, and they say devs should get most of the split, and the remaining would be given to the business people based on how much business they are actually bringing in. But even that seems too extreme for me. They said, sure business people can hire devs to make a product, but its expensive. Instead of code monkeys, there is business monkeys now. Just make the product yourself, and bring in a business person (they are also a dime a dozen), giving them a bit of equity per business they bring in, or just a flat 10-30%. This actually seems logical to me in modern times, but still a little immoral in my situation. I still feel ideas are important which is fine, but when it comes to equity, it should be based on contribution. The base idea can be considered contribution, but not by a big amount.

[Harold Mansfield]

So then what if you go into a partnership, starting with their idea, taking on 50%, add in all your ideas and experience to really make it viable, then finish the whole product, helped with all business decisions (always discussing together), both presented in all presentations and pitches, helped with marketing, got lots of mentoring help from your experienced friends, and noticed the other business person has done only some of the business work, i.e. the overall effort from them was much lower than all the work you did. Suppose the idea was successful, and now, the other person owns half of all profit. Where, most of the profit was because of the work you did. You would still be fine with the 50/50 split, or would have wanted to have a little bit more from the start because you knew you would be putting in more time and actual product contributions.

Yeah. That's what a partnership is. Like I keep saying, if you aren't the partnership kind of guy, then don't do it. But the very idea of a partnership and starting a business in general is that you are going to do whatever it takes to make it successful. There is no score keeping. You are both expected to give 110%.

If he's not the kind of guy that you can depend on to do that, then don't enter into a partnership.


Ive spoken to some tech lawyers before who have been in both dev and business sides, and they say devs should get most of the split, and the remaining would be given to the business people based on how much business they are actually bringing in. But even that seems too extreme for me. They said, sure business people can hire devs to make a product, but its expensive. Instead of code monkeys, there is business monkeys now. Just make the product yourself, and bring in a business person (they are also a dime a dozen), giving them a bit of equity per business they bring in, or just a flat 10-30%. This actually seems logical to me in modern times, but still a little immoral in my situation. I still feel ideas are important which is fine, but when it comes to equity, it should be based on contribution. The base idea can be considered contribution, but not by a big amount.

Like I said, good luck coming on to my project and my idea and trying to leverage more than 49% or agreeing to a partnership and expecting more than an even split.

If you want it all, then do your own thing or buy the guy out. Sounds like you're trying to do a hostile take over (with absolutely no money) before the thing even gets started based on what it MAY be, and I just don't see that working out well for you. I'm referring to over a decade of silicon valley failures that failed because of internal struggles before the thing even made a dime. You're lining up the t-ball perfectly to hit it right in their footsteps.

Honestly, I don't see where you have any leverage to demand anything. It's his idea. He should be the one setting the agreement and it's up to you to accept or refuse. If I were him I wouldn't even let it get this far. I'd kill the partnership right now because it would be obvious to me that no agreement that doesn't hand my idea over to you is going to make you happy. I'd rather see the idea die on the vine than be strong armed like that for my own thing and no one is throwing any money at me to justify it.

[Paul]

You are looking at it the wrong way. Rather than trying to determine who deserves more just figure what it is worth to you, regardless of what the other(s) get.

I have to do many “partnership” type deals. I don’t base my decision on who gets more, I base it on what I get. Sometimes they get more than they deserve, sometimes I do. I often do tons of work before anyone else. It’s only after my part is done that they can do their part. Their part is often easier than my part BUT just as, or more, important to the overall project.

Often there are hours, weeks and months of tedious behind the scenes work by me before the other partner (s) hit the streets and get the glory seemingly overnight. I am grateful not jealous.

Also, as Harold and others may have said if you don’t need the other to get started then go it alone. Build the prototype on your own and THEN look for a partner. It is the actual prototype (product) that has value , not you planning to make a prototype. You will be able to make a much better deal that way.

[BNB]

Devs always put far more value on their skill sets than they should. It's essentially labor. So if it's my idea and I want to bring you on, I look at how much labor, at what value, put a monetary value to that and figure out how much equity that is worth. Of course, this would almost never be 50%, let alone higher than 50%.

If you aren't going to be happy at 50% or less, than this seems like a bad idea to get into.