Equity · Entrepreneurship

How to calculate the equity with a partner who came up with the initial idea before?

Mohamad Oubaid Digital Services Manager at Innovation 360

March 28th, 2016

Hey guys, I joined my friend on his idea, he come up with it earlier, we agreed to pulley for a patent for it, it is still in the idea stage, but we will work together on the prototype to get the patent, and make the fund raising for it.
so my question is how to split the equity between me and him in a fair way.

Regards & Thanks

John Seiffer Business Advisor to growing companies

March 28th, 2016

He won't want to hear this but I would split the equity based on the work you each do or have done, not value the idea at all.

Let me explain. There are 2 types of ideas. One where the expression of the idea is all you need. Things like "I have an idea of a facebook for cat lovers who also enjoy beer." Those ideas are most prevalent and are worth nothing. If you had that idea, so did 15,000 other beer/cat lovers. It's the execution of these ideas that brings value - if you can actually make the thing and (more importantly) get traction. Remember, Zuckerberg's idea was not novel. Harvard U did it on paper, myspace and others did it on the internet. But he executed so well and that's what made it valuable. So split the equity based on the work you each do to execute.

The second kind of idea is much more rare. That's an idea of the form "I have an idea how to launch payloads into orbit for 1/2 the cost of current technologies." This kind of idea needs a lot more than just the expression of it. In fact, already a whole lot of work has gone into it before you can even suggest it. If your partner's idea is of this type then indeed give him equity based on the work he's done to get the thing as far as it is and give each of you additional equity for the work you do going forward.

2 other points (though you didn't ask) 1) look up founder vesting and put a vesting schedule into place. 2) None of this including the prototype or patent will be worth much if no one wants to buy it. So put some effort into CUSTOMER DEVELOPMENT before you spend a lot of money or time on building the product. 


Zvi CFA Senior Quantitative Analyst | Data Scientist

March 28th, 2016

Mohamad: Ideas are free, and are worth their cost: Nothing. Don't give anyone equity just for an idea. Equity isn't a reward for hard work, it's an incentive to participate going forward. The reason to give equity is because you'll need their thought leadership or dedication going forward. So, you want to split it based on the value that each of you will add going forward, and based how much equity it will take to get you motivated. A 50-50 split is typical and recommended for something in the idea stage. You both should be about equal. If you're not, the weaker of you should leave and a replacement should be found: Startups can't survive with a weak link from the get go. For reference, check out the Founder's Dilemma, by Wasserman. It's a great read on exactly these issues. z

Jacques Cock Partner at CQRS

March 28th, 2016

Yes ideas are free, but a good idea is invaluable. 

The key is what you both need to be able to go forward without spending too much time negotiating and bickering. So the key determinant I have found works is what both of you are comfortable and genuinely happy with.

A long time ago my Entrepreneurship lecturer during my MBA exchange at Berkley, who had generated for himself more than $100m of exits (in 1987!) said most venture fail because of greed and over evaluation of one's own contribution and under evaluation of the contribution of the other.

Just like an idea is worth nothing neither is a company if it does not succeed. The more you can look forward and develop together the more chances you have to succeed. Even then there is an 80% chance nothing worthwhile will be created. So go forward you can always adjust contributions through salaries, options, etc.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

March 28th, 2016

Division of equity amongst partners, co-founders, key employees and founders etc. has been addressed on at least 30 separate occasions on this site. I have listed 2 references below however if you query the boolean strands <division+of+equity> or <equity+division> or <partner+division> you will see a number of questions similar to your own with even more answers than have been provided here.

http://members.founderdating.com/discuss/3546/Determining-Equity-for-an-Employee-Pre-Funding

http://members.founderdating.com/discuss/136/Co-Founder-Agreement-Template

R. Singh Entrepreneur, Advisor, Get things done

March 28th, 2016

John said it well and I would second with this thought - Ideas are dime a dozen and value is created in execution. However I do think if your partner is working on the execution just like you are, he or she deserves a slight edge on the equity - may be 51/49 or even 55/45 if the idea is worth that. This is also assuming that both of you will be vesting over the life of the company per the same plan.

Anonymous

March 28th, 2016

@Mohamad - correct...the flag was around you asking the equity question before building the prototype in the first place, so wanted to provide what we did to answer this question.  Exactly what FD is used for I'm sure ;)

A couple of additional points of consideration while planning:
Different countries have different timescales for patent recognition.  Also, what we found when asking these questions and planning it out was that we didn't need immediate patents.  It was better to be first and best before seeking protection in areas that we knew we could enforce and were actually relevant (ie. directly contributed to valuation).  Many in our field have patents they can't enforce because they are too vague actually.  So just a caution on this.

M

Rob G

March 28th, 2016

equity split is probably the most commonly asked question on FD.  spend some time to search FD.  there is no magic formula.  look at a few methods/approaches that make sense to the 2 of you and see if you can agree on one.  Also, i disagree with the fashionable premise that ideas aren't worth anything.  Good ideas, well thought-out, researched and documented (especially in the form of a well-written and issued patent) can be worth a great deal.  Well thought out includes market analysis, pricing analysis, competitive analysis, business modeling, etc.  A bad idea well executed is still a bad idea.  A good idea poorly executed is still an opportunity. 

Sandy Ressler Computer Graphics Guy at NIST

March 30th, 2016

Ideas are a dime a dozen (someone had to use the tired phrase ;-) ... Having had a gazillion of them and not managed to execute on almost all it's the sweat of execution that is the major work and should be the major reward. Perhaps something like an additional 5% for the original idea but no more. Also arguing over 100% of something that is worth nothing (yet) is probably more damaging then keeping a good trusting relationship with your partner. Good luck!

Jackson Powell UI/UX Designer & Front End Developer

March 28th, 2016

Great thoughts and points from John. For more ideas on how to think about the equity question, you have taken a look at this blog article: http://www.thesmallbusinessforce.com/blog/2252/deciding-how-much-equity-to-give---how-much-is-less-important-than-what-its-worth/

Alex Baldocchi Brand and Digital Marketing Strategist

March 28th, 2016

Hi Mohamad, Everyone can come up with an idea - the truly difficult part is the execution/marketing stage. You have to have a clear understanding of the "division of labour" with your partner if the equity is split evenly between the two of you. Good luck. Alex