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Incorporation and stock sharing dilemma

5 points by atiw ↗ HN
Hi everyone, This is my first post here. I have been just a silent reader all this time. Finally I get to post something as well. Hope this helps others as well.

So, let's get started. (P.S. - I am avoiding mentioning names of stuff like university etc, since it will be very

embarrassing if this gets read by my future co-founder, as he doesn't know about this dilemma i am facing yet)

First, A little background. I graduated as a Master's in CS from a reputable university this

summer. I am planning to start this company that uses AI to solve some major NP complete

problems related to resource allocation problems. It's planned to be a software product company.

This has been a product of my master's thesis. So, obviously the IP(Intellectual Property) is in both mine and my adviser's name. This idea is

basically an evolution of his idea, which his earlier students had been trying their hands on,

but it didn't quite work as well as it was supposed to be.

And finally, I came along and with all my magic touch (If you can believe that), we did it. I

started implementing from scratch and finally after one and half years or so, we got it working. Now, this product has myriad applications and all that, but we want to focus on two, at most,

for now, and see where we go from there. and when i say we, i mean the company.

I guess we have enough information now.

I have two major questions for you guys.

1. I have to incorporate this company sometime this week, since we had a demo last Friday and it

went very well. Now, the users are asking for this product, so this is the right time to incorporate and start selling i guess.

Now, I am not sure what kind of company it has to be. According to Ycombinator FAQs, we need to be a C-Corp. I am wondering "Is that like the common

requirement to accept money from any of the other investors as well? or is it just YC? ". How about other types? LLC? etc etc. I am not even sure what other types are out there, except these and S-corps. How about S-Corps? I have heard about S-Corp but i am not really sure if startups qualify.

2. And the more important one. So, I finally had the guts to ask him (my adviser) about our

stock distribution as co founders of this new company. His thoughts were the following:

"We make it 50-50, except since he will be continuing his full time job as a professor/head of department and I am doing all the coding full time (most of it is done already), I get a fixed salary(not yet decided) first from the revenue and then we evenly get 50-50."

Now, I was all happy with this for a few hours, thinking this is great. I start selling my

product, and apply to Ycombinator, which obviously is going to invest once they hear of me, my co founder, my company and my product. And I get to go live in bay area and share the startup experience with you guys.

And then i called people to talk about this and share this great news... I go : "Hey, listen, my adviser wants to open a company with me. How cool is that? This is totally awesome. He is a genius, and now he wants to partner with me"

Too bad, I had mixed opinions from them and that got me all confused.

Here's the thing. I am pretty sure he is NOT going to leave his job. And I am the one who has coded everything in this product. But the initial idea was his. IP is shared between both of us.

But if you ask me, he taught me everything related to this idea, and he has been helping me

through the worst of my times(I was in a coma, horrible horrible stuff happened to me,and he

agreed to give me a chance and guide me , believed in me, when i was almost broke...so....u

know...he is like...i don;t know, if you divide god into half....one half....well whatever,

that's another long story...maybe later)

He is not bringing in any coding to the company, though we always talk through all features of

the product and decide it. He is not an MBA, he is more like a head of dept now. He has opened 2

startups, he has so much more experience, he is a brilliant guy and i feel so lucky for even

...

6 comments

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jacquesm
c-corps are fine, but I think you have to solve your other issue first.

50/50 means a 50/50 commitment.

In the situation you sketch it's more like 90/10, after all it's free money to your adviser.

I highly doubt a VC would invest in a company that has 50% deadwood on board from day one.

See the 50/50 as an opening offer, now the negotiations begin. You're young, he can't do it without you but you have plenty of time and energy to go and do something else, obviously you've got talent.

remeber: everything comes to those who wait, negotiating under pressure is the worst you can do, you have to get in to the mindset that it can take as long as you want, best to not do any deal than to do a bad one.

bdfh42
The past is a "sunk cost". Start from today. Who is doing what into the future.

Do not undervalue a founder who can bring in investment but equally do not over-value this attribute. Think about how you would go about compensating another developer joining the team - how would that change the stock split - do you need to reserve shares for future contributors.

If you must go 50:50 with a salary (when income flows) - negotiate how you can convert salary into stock.

jacquesm
To bring investment can be covered with a success fee when the deal is inked, it does not warrant a 50% stake pre-money in the company.
yalurker
The past is not a "sunk cost" given the IP issue. It sounds like the poster just continued research the prof was already doing in his lab.

At an extreme, suppose OP just abandoned the prof and started the company solo. Certainly the prof could later sue for his fair share. I would suspect the University (and/or agency the research funding came from) may have some IP rights here too.

Essentially, you can't just treat this as "the start of a business". You need to look at it as "we invented something in the lab, and now we want to sell it".

He can certainly negotiate, but 50/50 does not sound unreasonable. One key component in my mind would be "how much value was created already" versus "how much value will be added in the coming months/years".

atiw
Well, let me put it this way. I am not going to abandon my prof in any case, both due to respect and sense of legality and righteousness. What I want is to figure out a way to make everyone happy, future investors, and both of us. But I agree with yalurker, in the sense that: yes, this is something invented in the lab, only by me and my prof, and we want to sell it since it's so matured now. The university is going to release the IP to both of us, and we will be paying the university an agreed upon share, it's 10% as we have been told. So, really it's more like an issue between our shares that's troubling me so much. In a perfect world, he could have joined me in the venture and i would have gladly made it 50-50 (hell, i would have even gone for 55-45), or maybe i wouldn't have told my peers this and never would have been asking this question anyways, both to myself and to all of you. If only it was a perfect world....

I hope somehow we get close enough to the magic number, which would make everyone happy.

atiw
P.S. - I might have said something that led people believe he is bringing investment too. Well, He is NOT. He is NOT investing or bringing in money of any sorts. So more I think about it, it's more like consulting.

Now, what are your thoughts, after I told you guys this explicitly (somehow I thought it was obvious...should have mentioned this in the minus points, now I don't seem to be able to edit the post...anyone willing to help me with doing that....that way whoever reads the post gets the whole scenario.)