Partnership equlity split
- May 3, 2017 at 11:47 am #170237
I was wondering what people’s thoughts are on a potential partnership equity split. Given the scenario..
Founder A – has built some SaaS software and personally spent a few thousand $ getting website setup and other startup costs.
Potential business partner B – Is potentially coming on bored to help with strategy and growth..
What equity would people offer to person B? 60/40 split? Would you use Vesting? If so, what milestones would you set? Would you require person B to invest some $ and then give 50/50? Would you offer person B Voting rights?…May 8, 2017 at 11:20 am #170363
My opinion would be for you to identify which roles each of the co-founders plays and sum up the respective points. This amount divided by the total number of points for all co-founders, represents the share in the equity. For example, if one of the founder gets 2000 points and the other gets 3000 points, the fair split is 40/60.August 7, 2017 at 11:22 am #173563
I often advise startups to use a consortium approach, otherwise known as a contractual joint venture. A consortium is a group of participants coming together to achieve a specific objective. There are many legal advantages to this but I won’t go into them here.
You start by agreeing an hourly rate for each participant which is based on market comparables. Next you track the hours each party works which allows them to accrue a quota share of what has been built. Once the startup is up and running and has some usefulness for its customers, the consortium can be transformed into a legal entity on the basis of the quota shares acquired by each participant. If one or more of the participants don’t want to continue in this adventure, their share is bought out by either the other participants or by the company itself.
There are many variations you can make to this kind of arrangement but this is the general scheme. For example, how much a non-incorporating participant will be bought out for can include a rate of interest just like it may be limited by the market value at the end of the first year of operations based on an actual purchase or according to a predetermined formula. Similarly, the agreement can state the work you already put into conceiving the prototype has an initial value of “X”. Likewise, over the course of the project’s life you may need to bring in other participants so you have to accommodate those kinds of adjustments. You may also have expenses during the build out so you have to decide how those are handled. You get the idea.
Startups, fundraising, crowdfunding.