I approached my friend for an idea to make a website. It was my idea and we decided to do it together, but we did not discuss any equity splits. The website deals with furniture and my partner already is a furniture retailer in the region so i saw it as an advantage.
For 3 months we worked together on the website, dealing with freelancers, brainstorming ideas but after that, he decided that he just wanted to be the investor and i should do all the work, because it was the initial chat and he has money to invest. So for 1 year, i have been working on the website and coming up with all these really unique artificial intelligent features for the website.
We then had the talk about the equity split and he says 50/50 is not possible because he is investing and i am not putting any money into the business so unless i am willing to put in half the investment, then it can work.
He then said 70 for him and 30% for me should work and we agreed that i will be the Cofounder and CEO of the business.
I work now 9 hours a day on the website, improving it, working with developers, cross checking every feature, coming up with new features. The website has not launched yet and we still have not got any sales.
I currently have no salary and i am working for 30% equity.
He has also not invested any money into the business, he just pays for everything that requires payment. There has no been like an investment specifically for the business that i can work with, if anything requires payment, it reaches him and he sorts it out.
What do you guys think about this? Is this split reasonable? Should i be receiving a salary even though we have not launched?
How should it work?
Always a discussion better gotten out of the way earlier than later. But since you are in this situation you move forward. First of all, he is investing if he is paying for bills. An investor would be covering operating expenditures so that counts. Don't look at that wrongly and short your friend. I would say in this situation, you should look at how much he has put toward the business. The problem is there are many ways to evaluate your business. Im sure the "slicing the pie" guy will plug his book as he does for every one of these types of posts.
Does the business get up and running without your friend? If the answer is no, then you are left with an alternative, take a big chunk at 30% of something or get more of nothing.
The investor generally has the final say. Based on what I read and limited knowledge of your specific situation. Your friend has the domain experience. He already has an established base in the industry. He is paying the bills. He is offering your 30% equity in a situation for which he could just pay a fee to a developer. I don't think your friend is being unreasonable. Why are you not asking for a small stipend to live off while you develop? Nothing wrong with you going back and communicating with him and asking for this plus tell him you would appreciate 35% or 40% based on the fact you are putting the time and effort into building it.
At the end of the day though....from his viewpoint...you are utilizing his base of business...he is paying the way so that you can get your idea up and running...you will likely gain from repeat customers of his...he is offering you the CEO role, letting you build the business as you see fit and you are taking 30%.
Now if your expertise will increase his current business sales, then you should most definitely ask for a percentage of increased sales from your website. But if the website is a separate and new business..that may be more difficult to establish. Make sure you get everything in writing and make sure your shares in the company are non dilutable. Have anti-dilution clause.
Agree with David M's points especially that your partner IS investing in the business especially if he is the one paying for a year's worth of software development plus everything else. I estimate if he has invested more than USD$120K then this is split is quite fair. Also, most founders would envy the position you are in. Your partner has basically backed and bankrolled you by putting money behind your idea which is a rare endorsement outside of "friends and family". This is saving you the agony of spending your time chasing other investors or you investing your own money in addition to your time. Plus, whatever he has invested boosts the perceived value of your company. This will be valuable with other investors (should you need them).
You should get to an agreement fast though because if you expect to get paid, you better get clear on how this is going to happen. Also, if you cannot get revenue flowing through this endeavor soon your partner is going to be the party thinking your 30% share is egregiously high. Good Luck!
Today, I was in a session in my school about how to split equities. This topic is really a sensitive specially when co-founders delay the discussion about it. I will not be able to say how much should each co-founder take because no right or wrong answer for that, but I want to share with you some of the factors that you and your co-founder may consider while splitting equities. You may need to think about the current/future contribution of each one of you in the company, the market norms, the risks that you are both taking for the sake of establishing this startup, the culture and finally how much money each one of you is putting. You also need to agree on the decision making process and what will happen if you both (or one of you) want to break this tie.
In the past few startups that i've been involved in, it was always just the opposite. The full-time working partner got the 70% range and the investor got the 30%. Makes no sense that you give up 70% solely for money. UNLESS, the money is so substantial, that it does make sense. LOL if that makes sense...
Look at shark tank, pitches are for 5-30% typically. Once in a while, on a very specific deal, the ratio is reversed.
@Anonymous, one thing you are forgetting is that Shark Tank Investors are generally investing in businesses that are up and running with proven revenues when they accept lower equity stakes. Admittedly I do not watch the show very much at all. BUT the few times I have seen it where people offer small equity, it is because their business has already proven to have revenue streams and value. That is not the case here.
I guarantee you all of them would seek much higher %s if someone came into them with the idea and asked them to fund the development because the risk is much greater. Especially if they are utilizing one of the investors current businesses. You are also looking at it COMPLETELY incorrectly when you state makes no sense that you "give up 70%" At the most he is giving up 20% because they initially went into the venture as 50-50 partners. On top of that he states he "saw the advantage" of utilizing the business his friend is already in which is Furniture which his website will utilize. Now..if his friend is not going to utilize his existing furniture business, then yes that changes a lot.
Type of investor, size of investment, stage of the business, and many other factors play into it. We are all making rough generalizations because we do not have all of the information. Bottom line this is a SHINING example of why having a business plan in place is so important in which roles are outlined, and why proper formation of an LLC, or proper incorporation of a corp with founder contracts is so important early on in the process.
Are you working on this full time and foregoing salary? Even if you are not, work out roughly how much time you've spent on it to date with an hourly rate, and bring that into the negotiation with you - I think that should be included when looking at an equity split.
If he is paying for developers that can add up to quite a lot. If it's just hosting and s/w subscriptions, it's not a usually a big investment.
Checkout Slicing Pie. I stumbled upon this, but I really like his ideas on equity splits. I recommend you check it out. There is free material - so you don't have to buy the books - https://slicingpie.com/