How should I decide on equity and control in my business?

[TheProcess]

Hey guys, I recently started a business with a friend of mine.

He has already started two businesses and has done well for himself. He's a couple years older than me as well. This is my first business.

He's mostly busy with his other business but he will help me out with this business as well. He is more so in the "advisor role". He's also someone I trust and someone I've been friends with for a while.

As of right now, I have 80 percent equity in the business, and he has 20 percent.

He's going to put in 20 percent of the work into the business while I'll be putting in 80 percent.

We're in a bit of dilemma right now.

Our long-term vision for our business is to make it some sort of a social media platform, an app.

However, right now we're simply trying to build the website.

Neither me, nor my friend and cofounder have the coding skills to do any of this.

We are looking for a third cofounder - a CTO.

We've been interviewing people in the last few days and we have some options.

So far we've done things such as create a business plan and conduct market research. People seem to really like our idea.

We're also probably going to get a few thousand dollars in funding.

One potential CTO is asking to receive around 25-35 percent equity.

One way the equity will probably be divided will be something along the lines of:

Me: 50 percent.
My friend: 20 percent.
CTO: 30 percent.

I have a few questions:
- Is giving 30 percent equity to somebody we don't know well a bad idea?
- How should we decide on "control"? My friend is suggesting that, despite the fact that I'll be the person with the most equity in the business, the three of us should have equal control, or at least me and him.
- Any other piece of advice on this situation would be greatly appreciated.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[sparechange]

I wish I could grab you through the monitor and violently shake you while screaming at full lung capacity.

Ditch the friend, take the 20% back and do it yourself, you don't need a useless dummy for an advisor role.

Do everything by yourself / hire a cheap developer

Right now you've got a useless idiot that doesn't know how to code and is ''advising you'', I'll forgive you since your a newer entrepreneur but this is mistake #1 that most people make. Making buisness deals with friends is one of the worst sins you could possibly commit, how will you manage him when he's slacking off? Answer, you won't.

Hire someone overseas to code it for you and launch it solo. This isn't my space so I have no idea what prices are like, do your own due diligence

 

[sparechange]

Your Access To This Website Has Been Blocked

Something in your behavior has triggered our protection systems - we apologise for any inconvenience this process may have caused.

www.fiverr.com

Here's a start

 

[TheProcess]

I wish I could grab you through the monitor and violently shake you while screaming at full lung capacity.

Ditch the friend, take the 20% back and do it yourself, you don't need a useless dummy for an advisor role.

Do everything by yourself / hire a cheap developer

Right now you've got a useless idiot that doesn't know how to code and is ''advising you'', I'll forgive you since your a newer entrepreneur but this is mistake #1 that most people make. Making buisness deals with friends is one of the worst sins you could possibly commit, how will you manage him when he's slacking off? Answer, you won't.

Hire someone overseas to code it for you and launch it solo. This isn't my space so I have no idea what prices are like, do your own due diligence

I disagree,

He's not a useless idiot. He has already created two businesses.

I've been watching videos on how to start a startup and they always talk about how it's actually better to have a friend as a cofounder. This advice is coming from people who have worked on billion dollar businesses.

Also, if anything, he won't be the one slacking off. He has better work ethic than I do.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[sparechange]

I disagree,

He's not a useless idiot. He has already created two businesses.

I've been watching videos on how to start a startup and they always talk about how it's actually better to have a friend as a cofounder. This advice is coming from people who have worked on billion dollar businesses.

Also, if anything, he won't be the one slacking off. He has better work ethic than I do.

Ok bud, goodluck with the venture..

 

[minivanman]

I wish I could grab you through the monitor and violently shake you while screaming at full lung capacity.

Ditch the friend, take the 20% back and do it yourself, you don't need a useless dummy for an advisor role.

Do everything by yourself / hire a cheap developer

Right now you've got a useless idiot that doesn't know how to code and is ''advising you'', I'll forgive you since your a newer entrepreneur but this is mistake #1 that most people make. Making buisness deals with friends is one of the worst sins you could possibly commit, how will you manage him when he's slacking off? Answer, you won't.

Hire someone overseas to code it for you and launch it solo. This isn't my space so I have no idea what prices are like, do your own due diligence

Now slap him once for me

I can see you are 100% confused because in the title it says.... How Should I Decide On Equity And Control Of My Business.

It is NOT YOUR business. You have partners.

You may luck out and be the 1% that has a good experience in having a partner and you may luck out and be the .000000001% that has a good experience with more than 1 partner...... but I doubt it. So do this for yourself since you won't listen. Use this business as a learning experience. When it fails, wake up 3 days later and make a new plan and do the next one alone. And before this business fails..... go out and have good times with your friend because when this is all said and done, I doubt there will be any good times to be had. I hope I'm wrong and in 3 years you can come on here and tell me what a dumb@ss I am, but I doubt it.

As for sparechange being wrong about your friend, the advisor, if your advisor was very good, he would have advised you to not bring on a 3rd 'partner'. I've had many profitable businesses and here are some of my personal rules... never go in to business with a friend or family. Never charge a friend or family for work done. In a few of my other businesses, we did work for friends but I never charged them. That way they couldn't complain about something I gave them for free. And I told them that before the job was started. As for family, I let them choose who they want to do the work and I just pay for it. Much easier that way. Good luck!

 

[sparechange]

You may luck out and be the 1% that has a good experience in having a partner and you may luck out and be the .000000001% that has a good experience with more than 1 partner...... but I doubt it. So do this for yourself since you won't listen. Use this business as a learning experience. When it fails, wake up 3 days later and make a new plan and do the next one alone. And before this business fails..... go out and have good times with your friend because when this is all said and done, I doubt there will be any good times to be had. I hope I'm wrong and in 3 years you can come on here and tell me what a dumb@ss I am, but I doubt it.

What type of partners?

'' you may luck out and be the .000000001% that has a good experience with more than 1 partner...... ''

Isn't that the dream of every man?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[minivanman]

What type of partners?

'' you may luck out and be the .000000001% that has a good experience with more than 1 partner...... ''

Isn't that the dream of every man?

Well, we are on a business forum. I didn't say sexual partners...... any experience with any amount of sexual parter(s) is better than a day at work so there is no comparison there. My last boss in the 90's was a swinger.... I figured it out as we were all sitting in a hot tub at his house. That was the last party at his house for me. And another rule for me to add to my notes.

 

[TheProcess]

Now slap him once for me

I can see you are 100% confused because in the title it says.... How Should I Decide On Equity And Control Of My Business.

It is NOT YOUR business. You have partners.

You may luck out and be the 1% that has a good experience in having a partner and you may luck out and be the .000000001% that has a good experience with more than 1 partner...... but I doubt it. So do this for yourself since you won't listen. Use this business as a learning experience. When it fails, wake up 3 days later and make a new plan and do the next one alone. And before this business fails..... go out and have good times with your friend because when this is all said and done, I doubt there will be any good times to be had. I hope I'm wrong and in 3 years you can come on here and tell me what a dumb@ss I am, but I doubt it.

As for sparechange being wrong about your friend, the advisor, if your advisor was very good, he would have advised you to not bring on a 3rd 'partner'. I've had many profitable businesses and here are some of my personal rules... never go in to business with a friend or family. Never charge a friend or family for work done. In a few of my other businesses, we did work for friends but I never charged them. That way they couldn't complain about something I gave them for free. And I told them that before the job was started. As for family, I let them choose who they want to do the work and I just pay for it. Much easier that way. Good luck!

Hey man,
I was super motivated by this first business at first. But the last couple days I've been feeling very demotivated. And I don't know why. But after reading this, maybe you're right. Maybe I just need to do this first business on my own and figure it out.

I don't like that my friend is sort of taking the charge and making most of the decisions, subconsciously. I tend to agree with him because he has more experience than me. But I think that I may need to just do it alone.

 

[TheProcess]

I wish I could grab you through the monitor and violently shake you while screaming at full lung capacity.

Ditch the friend, take the 20% back and do it yourself, you don't need a useless dummy for an advisor role.

Do everything by yourself / hire a cheap developer

Right now you've got a useless idiot that doesn't know how to code and is ''advising you'', I'll forgive you since your a newer entrepreneur but this is mistake #1 that most people make. Making buisness deals with friends is one of the worst sins you could possibly commit, how will you manage him when he's slacking off? Answer, you won't.

Hire someone overseas to code it for you and launch it solo. This isn't my space so I have no idea what prices are like, do your own due diligence

Hey man, you may have actually been right. Please check my reply to the other commenter.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[sparechange]

Hey man, you may have actually been right. Please check my reply to the other commenter.

So what is the plan moving forward?

 

[Odysseus M Jones]

Is giving 30 percent equity to somebody we don't know well a bad idea?
- How should we decide on "control"? My friend is suggesting that, despite the fact that I'll be the person with the most equity in the business, the three of us should have equal control, or at least me and him.

It's not a bad idea to give the CTO 30% equity if they perform, you're an internet company, you need someone inhouse who can tweak the software on a daily basis, it's fine outsourcing but it'll cost a fortune to tinker with, not to speak of the delay, yes things can be done realtime on the net, but nothing beats having the coder onsite.
It's like an F1 team, do you outsource the mechanics? No, you want guys on the shop floor who can instantly respond to on the fly changes

Ask yourself this, would you rather have 80% of nothing or 50% of lots?

If your friend brings something to the table then he's worth 20%, or maybe he also take a haircut since you need a third partner for a skill neither of you possess. And as you said he's an "advisor" advisors don't get control, they only "advise"

As for control: Who's idea/vision is it?
If you're doing most of the work and not making decisions you're just an employee.

A small company needs one decision maker that can't be outvoted regardless of whether those decisions will ruin the company.

You could weight control the same as equity split so in effect you have control unless your friend sides with the CTO in which case you'll also want to negotiate veto powers beforehand.

You made no mention of how the company is financed

As others have mentioned it's not ideal to go into business with friends, but it's not a guaranteed failure either, just be prepared that you may not be lifelong buddies.

 

[TheProcess]

So what is the plan moving forward?

So I actually changed my mind again. But me and my friend had an honest talk.

First of all we are acquaintances, rather than friends, and we are okay with the fact that our relationship might deteriorate with this venture.

Second, I think he's a great asset.

So far we've finished a business plan and applied for 20 thousand dollars in funding. We have a pretty good shot at getting it since my friend and business partner is good friends with the people giving the funding.

We've also built a prototype and done a lot of market research and testing.

Next step is to hire a CTO or pay someone to create an MVP. We are still awaiting funding.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[TheProcess]

I serve as an advisor to several companies. You know how much equity I get? About 1%, give or take. And I have absolutely no voting rights whatsoever.

If you friend is an advisor, you shouldn't be giving him 20% of your business and you shouldn't be giving him any say in the business.

Unfortunately, if he's not willing to be an advisor for a lot less than that, he doesn't much believe your ability to build/scale the business.

So he's not going to be just an advisor but a business partner as well. Someone worth 20 percent.

 

[TheProcess]

It's not a bad idea to give the CTO 30% equity if they perform, you're an internet company, you need someone inhouse who can tweak the software on a daily basis, it's fine outsourcing but it'll cost a fortune to tinker with, not to speak of the delay, yes things can be done realtime on the net, but nothing beats having the coder onsite.
It's like an F1 team, do you outsource the mechanics? No, you want guys on the shop floor who can instantly respond to on the fly changes

Ask yourself this, would you rather have 80% of nothing or 50% of lots?

If your friend brings something to the table then he's worth 20%, or maybe he also take a haircut since you need a third partner for a skill neither of you possess. And as you said he's an "advisor" advisors don't get control, they only "advise"

As for control: Who's idea/vision is it?
If you're doing most of the work and not making decisions you're just an employee.

A small company needs one decision maker that can't be outvoted regardless of whether those decisions will ruin the company.

You could weight control the same as equity split so in effect you have control unless your friend sides with the CTO in which case you'll also want to negotiate veto powers beforehand.

You made no mention of how the company is financed

As others have mentioned it's not ideal to go into business with friends, but it's not a guaranteed failure either, just be prepared that you may not be lifelong buddies.

So he's not going to just be an advisor, but a business partner. I had a talk with him.

As for control, I will be control because I have majority of the equity.

As for how the company is financed, please see my reply to the other commenter. We applied for funding and we got a decent shot of getting 20 k I think.

We also agreed that we are okay with the fact that our friendship might be non existent after this venture.

 

[sparechange]

Well good luck!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[scottydoes]

If you are going to bring on a third partner, I would advise you split that equity with your current partner. Equal dilution.

Besides having a business plan, I would advise you to sit down with your partner and go over these things below. There are definitely more but these are what first come to mind. Think about going into business with someone similar to a marriage. It's a big deal.

1. What are your personal and business values? You really want to make sure you align with each other on these. If not, it will be a long, tough road.

2. What are your expectations of each other. What exactly will each of you contribute to the business. What are your jobs/tasks.

3. Go over possible scenarios for the business. Every little thing that could possibly happen and how would each of you react and what decision would you make.

4. Create an operating agreement, clearly stating you have control, your individual roles, etc.

Good luck!