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Equity Split Between Co-Founders

drako98

New Contributor
Sep 20, 2019
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Quick Rundown

I am running a music production site to help music producers. The site currently contains a free download library of music production tools as well as interviews, tutorials, and music production news. The site made almost no money when I was running it and all the social media accounts for the 3 years of its existence. My plan was to build an audience before I started selling to them, which is why I did not look to make money. I met my co-founder and we transitioned into building a business and did planning for a year. Right now we are getting a web developer to build a marketplace that will be incorporated into what I have already created with the website. Now we are at the point where we are working on a founders agreement and equity split. (yes, this should have been done earlier)

Important Factor to consider
  • We are both financially unstable. However, my co-founder is more financially unstable than me and has a hard time paying his bills.

My Relationship With Cofounder
  • When I was networking for my website, I met my co-founder
  • On and off for a year, he helped me with potential ideas on how to grow the website's audience and helped build my Facebook group without asking for anything in return r
  • A year after I met him, I hired him to build the brand identity for $700 as he had prior experience with working on brand identities.
  • He worked on the brand identity and this eventually led to us collaborating on building a business.
  • In addition to the $700, I started to pay him monthly 1 month after the $700 payment for his help with building the business. I paid him $300 each month for 5 months and have paid him $140 each month for 4 months
  • We are now at the point where we have the business plan, website mockups and specs and requirements done and are having the marketplace built
  • Through this time, we did not discuss a founders agreement and we are currently trying to work out an agreement and most importantly the equity split.

Past Contributions

Cofounder
  • Came Up with business idea
  • Created Mockups & Specs & Requirements for website
  • Created logo, tagline, brand story, and brand meaning (Didn’t finish everything he said he would for the brand identity because he said he wanted to wait till the website was being built)
  • Found web developer that we are currently using to build the website.
  • Has experience in brand identity, graphic design, and a little bit of entrepreneurial experience.

Me
  • Founded the website and ran it by myself for 3 years
    • Built website
    • Grew community (social media following, email list, website monthly visitors)
    • Maintains the community every day
  • Paid my co founder $2,800 over the last year to help me build the business
  • Spent $15,000 on the project not included the money sent to cofounder. Co-founder has contributed $0 to this business and doesn’t plan to contribute out of pocket for the business because of his financial situation.
  • Created the business plan
  • I have more expertise in the music industry than my co-founder, but no experience with entrepreneurship except for the 3 years running the website and community.

Future Contributions

  • We both plan to be with this business for the long haul. (We might change our minds in the future, but for now, we don’t plan to build the business and then sell it as soon as possible)
  • The job distribution for running the business is pretty evenly split.

Other Notes

  • In the time that my cofounder has been getting paid by me to help build the business, he has had a lot of issues with his living situation and every day living because of his financial situation. Everything that he created (mockups, logo, brand identity, etc.) for building the business was never on time. His personal financial situation has been an issue that keeps him from spending consistent time on this project.
  • In the year that we were working on building the business, I just maintained the community and did not look to expand it.
  • My co-founders strength is his ideas. I still am not sure about the execution of his ideas though.
  • He is also a graphic designer, but I am skeptical of his ability in this as he did not have many examples of his work and the ones he showed me were not very good. He has not worked professionally as a graphic designer for a decade.
  • I trust my co-founder, but I am not sure if he will be able to put in the required work for it to be successful.

So the question is, what should our equity split be in the company?

In my opinion, I should get a bigger share of equity. (I know, shocker)

I was thinking 65% for me and 35% for my cofounder.

I founded the website and community and laid the foundation for 3 years. My cofounder had little involvement in this. (helping with ideas and a little community building in the Facebook group)

My co-founder came up with the business idea, created the mockups and specs & requirements.

He has contributed $0 to the project. I have paid for everything.

When we launch the marketplace, we will be starting from with a community and foundation that I laid over the last 3 years.

I would like to know your honest opinion on an approximate equity split based off of the information that I have provided.

Thank you for taking the time to read this post and comment!

I know it was quite long, so I really appreciate it!
 

minivanman

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Mar 16, 2017
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Back out now.

If he needs money, make a deal to pay him $x amount or % but do NOT have a 'co-founder'. Without money he can not move forward so he kinda has no choice.

Before you have anyone as a co-founder..... shut it down and move on.
 

lowtek

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Yeah, he doesn't sound like much of a cofounder. He sounds more like an employee. How much leverage does he have? If you back out and say "no, I'm not going to make you a cofounder", how much damage can he do?

He could be an employee with some upside, a few % to whet his whistle... but under no circumstances should you give him a big share when this is your project.
 

Rabby

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If you do proceed with equity splitting, do it on a time/cash basis. In other words, start with an initial value of the asset you built that had monetization potential. In this arrangement that's worth at least the time you put into it (x hourly rate), but probably more since you actually incurred risk. Add in your expenses, and whatever you paid this guy. You need some kind of multiplier to account for when you're taking risk and he's not... you're volunteering to open a vein to feed the business, while someone else is just offering to benefit from your risk taking. On his side, you can add in time he worked for free, or time he worked for less than what hundreds of other reasonable business people are actively trying to pay him for his services (use only the difference between what you paid him and what he could have made in that case). In no case should his time be valued at a higher rate than yours, the risk taker.

Bit the bullet and talk to a CPA and an attorney who can help you with this. From the sound of it, you're going to have problems if this is done on the back of a napkin... once it's time to make it official, make it official.

Maybe I'm missing some detail, but your equity split sounds way out of proportion. If you're paying him, the split shouldn't end up with him owning more than 5%. Again, is he supposed to get all the upside, while you take all the risk? It does not make sense. You can lose something. He's trading time for money, and can't even manage that. I would be very skeptical of this partnership.
 
OP
OP
drako98

drako98

New Contributor
Sep 20, 2019
5
2
11
Yeah, he doesn't sound like much of a cofounder. He sounds more like an employee. How much leverage does he have? If you back out and say "no, I'm not going to make you a cofounder", how much damage can he do?

He could be an employee with some upside, a few % to whet his whistle... but under no circumstances should you give him a big share when this is your project.
Hey @lowtek

Well he did come up with the business idea.

I have been in contact with him for a year and we have been planning the building of the business.
It is not like I am just telling him to do X job and he does it and that is it.

At this point he doesn’t really have much leverage. All the work that he has created for the business is the intellectual property of the business which I currently own as a sole proprietor.

If I back out and tell him that I am not going to make him a cofounder, then he really can’t do that much damage.

I would need to hire someone to help me further with the web designs and brand identity which would be very costly and add much more time for me to get the money for this project, but he wouldn’t ruin the business if I told him no.

This is my project, but he did come up with the business idea and essentially built how the website will be designed.

But then he also didn’t pay for it.

When I started this project, I planned on building an audience and then monetizing it somehow. I had ideas on ways I could monetize my audience, but did not have a definite idea.

When I met my potential co-founder, he helped me build the business then and there by planning the framework for how the business will run.

If I hadn’t had started working with him, I would probably still be building an audience.

I see your point though. Having him as an employee and giving him a small % in the company.
 
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minivanman

Platinum Contributor
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Mar 16, 2017
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Employee with a % is the only way to go. This is how bad things start. People get this far without having a solid plan or sometimes they get much further and then..... the partnerSHIP sinks to the bottom of the Ocean of Dreams. I always tell people that unless it is a 'for fun' business (no matter how big it can be) do not have a partner. Have your foundation for your own life before you involve others. Same can be said about relationships..... notice they both end in SHIP because they can both be found at the bottom of the Ocean of Dremas.
 
OP
OP
drako98

drako98

New Contributor
Sep 20, 2019
5
2
11
If you do proceed with equity splitting, do it on a time/cash basis. In other words, start with an initial value of the asset you built that had monetization potential. In this arrangement that's worth at least the time you put into it (x hourly rate), but probably more since you actually incurred risk. Add in your expenses, and whatever you paid this guy. You need some kind of multiplier to account for when you're taking risk and he's not... you're volunteering to open a vein to feed the business, while someone else is just offering to benefit from your risk taking. On his side, you can add in time he worked for free, or time he worked for less than what hundreds of other reasonable business people are actively trying to pay him for his services (use only the difference between what you paid him and what he could have made in that case). In no case should his time be valued at a higher rate than yours, the risk taker.

Bit the bullet and talk to a CPA and an attorney who can help you with this. From the sound of it, you're going to have problems if this is done on the back of a napkin... once it's time to make it official, make it official.

Maybe I'm missing some detail, but your equity split sounds way out of proportion. If you're paying him, the split shouldn't end up with him owning more than 5%. Again, is he supposed to get all the upside, while you take all the risk? It does not make sense. You can lose something. He's trading time for money, and can't even manage that. I would be very skeptical of this partnership.
Hey @Rabby ,

I appreciate you taking the time to comment on my post!

This was very insightful.

I will definitely work out the equity split on a time/cash basis and see how this looks.

Once I get these time/cash values for both of us, how would I then split up the equity?

Would you say that past contributions are weighted much heavier than future contributions when deciding an equity split in this case?

In the future, we are essentially splitting up all the jobs that need to be done for the business once the website is built.

You are absolutely right, I have taken most of the risk here.

He also feels he is taking risk as well. He is spending time on this project for a very very low wage in the hopes of getting a good size equity share.

When I first hired my potential co-founder, I just thought of him as an employee. I hired him because of his good ideas, we communicated well with each other, I knew of his financial situation, his past work experience, and I knew I could hire him for a job that I definitely could not do and he could do better at a very low price.

A few months after I started paying my potential co-founder monthly, we did discuss equity splitting and my willingness to give him some equity because of his ideas and leadership.

So as he was working for me, he had the idea that he was getting equity as well, which I absolutely still think he does deserve.

He feels that he deserves a sizable equity because he has been working for a very low wage and he has skills that I don’t.

Currently I am drafting a founders agreement based of research of founders agreements online and molding it to fit our situation. I wouldn’t say the agreement is being done on a “back of a napkin” but is definitely not the ideal way to get a founders agreement together.

Biting the bullet to hire an attorney might be the best move now.

Thanks again for your help here Rabby!
 
Last edited:
OP
OP
drako98

drako98

New Contributor
Sep 20, 2019
5
2
11
Employee with a % is the only way to go. This is how bad things start. People get this far without having a solid plan or sometimes they get much further and then..... the partnerSHIP sinks to the bottom of the Ocean of Dreams. I always tell people that unless it is a 'for fun' business (no matter how big it can be) do not have a partner. Have your foundation for your own life before you involve others. Same can be said about relationships..... notice they both end in SHIP because they can both be found at the bottom of the Ocean of Dremas.
Thanks for the help here as well @minivanman

An employee with a % does sound like a good way to go here.

The point we are at right now is not at a point where the ship will sink into the ocean of dreams.

Quick question, Would you say that past contributions are weighted differently than future contributions when deciding how much equity to give?

Thanks again for your help!
 

Davejemmolly

Bronze Contributor
I've Read UNSCRIPTED
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Oct 1, 2018
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Is your business profitable?
Another way to look at it is what percentage of your time you’re currently / projected to spend in the business.

At somewhere near a 50 / 50 split, then you should both be putting in similar levels of hours in.

Whatever you decide, make sure you build a vesting period into it (for both of you). If you’re not across how a vesting period works, definitely look into it.

It will give you (and the business) some protections around the equity you give away. Ie, 25% of his shares after the first year, 25% the next year etc.

That way if he bails after 2 years for a better paying job, you don’t have someone owning 40% / 50% of your company and not working there anymore.
 

Rabby

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Hey @Rabby ,

I appreciate you taking the time to comment on my post!

This was very insightful.

I will definitely work out the equity split on a time/cash basis and see how this looks.

Once I get these time/cash values for both of us, how would I then split up the equity?

Would you say that past contributions are weighted much heavier than future contributions when deciding an equity split in this case?

In the future, we are essentially splitting up all the jobs that need to be done for the business once the website is built.

You are absolutely right, I have taken most of the risk here.

He also feels he is taking risk as well. He is spending time on this project for a very very low wage in the hopes of getting a good size equity share.

When I first hired my potential co-founder, I just thought of him as an employee. I hired him because of his good ideas, we communicated well with each other, I knew of his financial situation, his past work experience, and I knew I could hire him for a job that I definitely could not do and he could do better at a very low price.

A few months after I started paying my potential co-founder monthly, we did discuss equity splitting and my willingness to give him some equity because of his ideas and leadership.

So as he was working for me, he had the idea that he was getting equity as well, which I absolutely still think he does deserve.

He feels that he deserves a sizable equity because he has been working for a very low wage and he has skills that I don’t.

Currently I am drafting a founders agreement based of research of founders agreements online and molding it to fit our situation. I wouldn’t say the agreement is being done on a “back of a napkin” but is definitely not the ideal way to get a founders agreement together.

Biting the bullet to hire an attorney might be the best move now.

Thanks again for your help here Rabby!
Past contributions are probably weighted more, yes. The reason being that there is more uncertainty in the beginning. Uncertainty of outcome * expenditure of effort and resources ~= risk. As the project develops there is typically less risk per dollar or calorie spent, because the path forward is more certain.

There's a book and method designed for fairly splitting equity that you might be interested in: Learn How to Fairly Split Equity with Slicing Pie Just keep in mind the risk - don't give everything away out of feelings of obligation or something, when your risk level is much higher. It's an easy mistake to make, and it can easily sink the whole project.

Good luck :)
 
OP
OP
drako98

drako98

New Contributor
Sep 20, 2019
5
2
11
Past contributions are probably weighted more, yes. The reason being that there is more uncertainty in the beginning. Uncertainty of outcome * expenditure of effort and resources ~= risk. As the project develops there is typically less risk per dollar or calorie spent, because the path forward is more certain.

There's a book and method designed for fairly splitting equity that you might be interested in: Learn How to Fairly Split Equity with Slicing Pie Just keep in mind the risk - don't give everything away out of feelings of obligation or something, when your risk level is much higher. It's an easy mistake to make, and it can easily sink the whole project.

Good luck :)
That makes sense why past contributions are weighted more and your equation for risk.

Thanks for the suggestion on the Slicing Pie book!

I'll will be taking a look at that today!

Yes, there will be a vesting schedule if I give away equity.

There is definitely a lot to think about so I make the best possible decision here.

There are many make or break moments for a business and this seems to be one of them.

Thanks again for all the help!
 

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