How much of my company should I give up to new "co-founders"?
I have a web site that I created by myself about two years ago and it has been floundering. I met a couple of people who have a similar vision. They have some good contacts and would be picking up the marketing/product side of the business while I continue to concentrate on the technical side of things. We are in discussions to partner up but I am wondering how much of the ownership of my company I should give up to them for their involvement in the company. Right now, revenues are zero so it would almost be like they were co-founders, but I have put a lot of effort and a little bit of money into the company over the years.
Do forget about the effort I have already put in and treat them as co-founders and evenly divide up the company? I know its hard to comment without the details, but any advice would be appreciated.
22 comments
[ 5.4 ms ] story [ 57.1 ms ] threadRather than asking yourself how much ownership of your company you should give your new partners, look at it the other way around: How much ownership should they give you?
If you have one of a kind domain knowledge or ability, then they might have to pay you much more than 1/3 of the company. After all, without you they would have a much reduced chance of success. If you are a cleaning lady, they can just pay you the usual cleaning lady rates, since there are a billion more cleaning ladies ready to take your job with equal ability.
Plus, you further assume that holding ownership of the existing company is worthless?
Obviously, your initial code base has some value to it. The above framework nicely value the past/future contribution of each party to remove much ambiguity.
That said, if the three of you are equally committed, you should probably be equal owners, based on the information you've shared.
If I was the guy turning your idea into gold and you held significantly more equity than me just because you built a prototype, that fact would bubble up and bother me exactly when you don't want it to - when things get tough.
Really, any nontechnical 'partner' had better be bringing in leads, selling ads, or otherwise causing cash to come in, or they are basically dead weight (and they'll have lots of little changes they want made to the site, aka the what color to paint the shed principle). Having spent hours and hours programming, while the 'partner' does basically nothing, thinking long and hard about usability and how things should flow, and then having a 'partner' look at the site for 30 seconds and start listing off changes that need to be made is not tolerable.
Let's call your potential partners "Dave" and "Joe"
Question #1: How much would you sell the company - lock, stock, and barrel - for right now?
Question #2: What do you think the valuation of the company is if you were to raise money?
Question #3: What will the company be worth in each of the following situations: -- If Dave joins but Joe doesn't -- If Joe joins but Dave doesn't -- The assumption is that, if both join, the valuation bump will be equal to the two above
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#2 is likely different from #1 by a wide margin but not necessarily.
Let's say that you felt that #1 was $250,000 yet your potential partners felt it was $100,000. You agree to compromise at $175,000.
I would explain these to the potential partners in terms of, "I'm bringing $175,000 to the table. Dave - we agreed that the company would be worth $225,000 if you joined. Joe, we agreed that, without Dave, the company would also be worth $225,000 if you joined."
Now, if all else is equal, then you could use the formula: $175,000 + $50,000 + $50,000 = $275,000 You: 63.5% Dave: 18.25% Joe: 18.25%
But it generally isn't equal. Dave may agree to a $3,000/mth salary while Joe needs $7,000/mth.
Will these people be offering genuine marketing (tailoring and designing your product to address specifically identified markets) or will they just be 'sales guys'?
If these folks will just be bringing in contacts and shilling the work you create, I'd recommend offering them a very lucrative commission on sales instead. Say, a ridiculously high percentage for the first n-years, with that amount declining over time to a regular commission as scale and sales revenue increases. Then, these people will only be rewarded (and rewarded handsomely) if they deliver on what they say they can produce while you retain full ownership of the intellectual property you will have 100% role and responsibility in creating.
Granted in that story I believe the guy was getting paid..but here its even worse, since you'll give up a chunk of your company and there is zero guarantee that the guy will live up to his resume.
The secret to being rich is 100% ownership.
Think of it this way - these people are getting a technological product that would take years to build for free basically.
Make sure you are also getting a good deadl for yourself.
As a fellow developer, I imagine you have worked on this for ages, and will likely continue to work on it even without them. It is important you avoid getting yourself put in a position where you cannot do that, or end up delivering IP to someone else to monetize. If selling your product ends up being more difficult than they think, will these bail and still demand compensation if YOU pick up the ball they drop and run with it? How serious are they and what signs are they giving you that they deserve equity at this point.
If all they are doing is sales, you can set up a commission structure, and tie equity in your issues to the company's hitting successful sales milestones. If these guys want ownership to start, another approach is to license your existing codebase to the new venture. Be sure to get this license down in paper!