How to split ownership with partner who will be absent for 2 years

[MitchTalmadge]

A friend and I plan to start up a small business selling room and equipment reservation software to schools and businesses, beginning locally. To start, please know that we are both 18 years old and very new to the process of starting and running businesses. This will be our first business. We have decided upon an LLC to boot. Unfortunately, my friend will be leaving for a religious mission at the end of the summer, and will be unable to talk more than through about a couple emails per week for the span of two years. We have put equal effort and time into the software we have created, and will invest equal shares into starting up the business.

Our problem is in deciding how to split up the company, due to this absence. We considered starting off with a 50/50 split and gradually transferring ownership to myself as time goes on. In this way, should we make any profits, he will receive his fair share for how much work he has contributed in the beginning to creating the software and for being a founding member. We are unsure if this is the right way to go, and we have not worked out the details, such as the minimum ownership that he will end up with, how to deal with adding new partners over the span of those two years, etc.

If you were in this scenario, what would you do?

Thanks for any assistance, it's extremely appreciated.

[turboguy]

If it were me and assuming he wants to be involved when he returns I would go with a 50-50 partnership and have you draw a salary while he is gone that gives you basically any profits that don't need to be retained.

[Harold Mansfield]

I'm spit balling here, but maybe draw up an agreement that makes you equal owners of the software. Period. This way if any kind of licensing or maybe even a sale deal comes your way over the next 2 years, he's in for his 50% of the software that he created 50% of.

As for day to day operations, first thing is to recoup any investment and get past break even on operating expenses. Decide on a fair salary for you who will be running the company, and a fair salary for him as an absentee owner who isn't managing the day to day operations. That salary should be based on a percentage of net, not a set amount since you have nothing to base any numbers on yet.

Anything over the set salary divisions goes into savings and doesn't get touched unless you both agree to use it for growth or expansion or whatever, or it just sits until he's back with the company full time.

Again, just spit balling.

[MitchTalmadge]

Thank you both for the great tips and advice!

Assuming we went with the 50/50 idea from turboguy, what would we do if we decided to add on another partner within those two years? Is that just a bridge to cross when we get there?

Also, while he has contributed 50% of the effort into the software thus far, the software is not complete, and will probably require improvements, bug fixes, and more development during those two years. Is a 50/50 ownership on the software still appropriate in this case? I understand that most of these things are up to us to decide, but I enjoy hearing opinions from people with experience in the field.

Thanks so much for all your help!! It's invaluable to us!

[Harold Mansfield]

Thank you both for the great tips and advice!

Assuming we went with the 50/50 idea from turboguy, what would we do if we decided to add on another partner within those two years? Is that just a bridge to cross when we get there?

Cross the bridge when you get there. Hashing out your own agreement will give some experience on how to structure agreements in the future,


Also, while he has contributed 50% of the effort into the software thus far, the software is not complete, and will probably require improvements, bug fixes, and more development during those two years. Is a 50/50 ownership on the software still appropriate in this case? I understand that most of these things are up to us to decide, but I enjoy hearing opinions from people with experience in the field.


Too many variables there. You're going to have to sit down and hash it out together. Maybe get an attorney who specializes in these things to help structure an agreement that everyone can live with.

[MitchTalmadge]

Thanks again, Harold!

I'm excited to get started on this business! I believe we can work it out from here. I'll let you know if any more questions arise!

[Business Attorney]

There is no single answer, You seem to be considering the most relevant factors and the two of you should discuss it and come up with an approach that you both agree on. The most important thing is that you agree on something in advance, as you are doing. You can always agree later to make adjustments but at least going in you both know the rules of the game and can act accordingly. That applies not only to bringing in a new partner but also to things like spending hundreds of hours fixing or upgrading the software. If there is money to pay you for all that work, perhaps the 50/50 sharing of the software still works. If you have to put in hundreds of hours of "sweat equity" for which your only compensation is your ownership interest, then you both will probably need to go back to the table and revise the percentages.