Partnership agreements

my partner is asking for more share than he deserves

Sue Chila cofounder of a IT consulting company

February 14th, 2018

We started a IT consulting company 1 year back.My partner and I Have invested equally in amount to start the business.We placed few consultants in different job positions and got profit.Now my partner brought more business to the company but I handled all the ground work from finding the right candidate and interviewing the person to placing that person in that job position which my partner bought the business/requirement.Now my partner is asking for 10% more share for him.Initially when we started out, we had a deal that all the profit is 50-50.Now he changed.How should I deal with him? I cannot back out from the business as I have invested money,time,ideas in bringing the business off the ground

Mike Moyer

February 18th, 2018

This is a CLASSIC founder equity dispute. In fact, given your 50/50 initial split, the chance that you were doomed to such as dispute was greater than the chance you would have avoided one.


There is, however, a simple and fool-proof way to solve this: switch to the Slicing Pie model. Slicing Pie is an equity split model that guarantees a perfectly fair split. It is the only way to get this right because all other models are simply variations of the same fundamentally flawed approach.


You can learn all about it at www.SlicingPie.com and you can unwind your current problem using the retrofit guide: slicingpie.com/retrofit-forecast


It will not only fix your current problem, but also ensure it won't happen again-ever.


-Mike

Narek Gevorgyan Looking for HR Tech cofounder for sourceable.ai

February 15th, 2018

Your company reached to a point with both of your efforts, and it might not be there if one of you were not there, but even counting that factor certain functions are more important than the others. I think both of you should re-evaluate the amount of job you do and importance of it.

David M

February 19th, 2018

@Mike Moyer-I appreciate your attempt to make equity allocation simpler. I think you are overselling the “fool proof” adjective, however certainly the diagnosis is worthy as a tool to get a general idea and track contributions.


The challenge I see with your grunt calculator spreadsheet…and correct me if I am misunderstanding your system. But you are equating hours spent in a company to equity ownership. Theoretically, that sounds great, but realistically hours alone or even as a major factor does not nor should be used to value equity worth. Unless of course you are assuming, which is a pretty big assumption, that productivity of founder one is equal to the productivity of founder 2. I have rarely seen this to be the case. One of the biggest issues CEO’s I know have is that they not only work more hours than other execs in the company, but their hours spent are far more productive to the financial success of the company. And, on the flip result, I know founders who put in less hours but are smarter, and more productive than the CEO might be.


The problem with your assumption is a pretty big one, or at least can be as it incentivizes hours spent toward a startup instead of actual outcome. Again, it is better than nothing…but “fool proof” is a stretch as is “perfect equity split.”


The other challenge is proper valuation and future valuation and the over all complexity and organic function of most startups. Lets say founder one spends 80 hours a week for several months developing and trying to seal a deal with a major partner. According to your Grunt Calculator, and again please correct me if I am misinterpreting this, but founder one increases his equity stance in the company based on hours, and the valuation of those hours. But lets say founder 2 has a past relationship with a major partner, and he seals the deal in a matter of two weeks. Taking it a step further though, founder one then utilizes the power of founder 2’s sealed partnership to attract and finally seal the deal for the company he has been trying to secure for the last several months. It becomes far more complex than your plug and equate grunt calculator.


I am all for trying to evaluate a fairer equity percentage. Too many entrepreneurs, many of whom you see in these forums, naively do a 50-50 handshake deal at the beginning rather than really thinking through roles and contributions.


The other issue of concern with your approach in an example similar to the above. 4 founders. Three have worked for 7 months starting the company. They are all engineers. One put $2M into the company, the other three are founders and equity players and have 7 months of 60 hours a week developing 4 prototypes. Only problem is 3 of those prototypes don’t work, or worse by the time they are completed a competitor has come out with a product that is similar enough and sends them 3 back to the drawing board. Technically, their time spent on at least three brings no value to the future valuation of the company. Its business and not charity. Their time should not be dismissed but in NO way should it be due equity merely because they spent time in the office. That is ridiculous. So is there an exception or quantifier in your formula for hours?


In continuing, The fourth founder comes in though and sees an opportunity with one of the prototypes. He works two weeks and sets up a deal with the leading producer of products in that industry, a company that does $4B in sales a year. They agree to produce the product under their specific deal points and scale the roll out to major retailers. Hours wise he only has two weeks. Cache wise, it is huge because this corporation and a deal with them will attract future investors. But the actual equity value can not be determined at this time. Certainly the result is worth far more equity than the 7 months of time the engineers gained equity on 3 failed products. Year one may promise 2M in revenue. Year three may contribute 20M. But in year three, the company may also have developed a relationship with the company due to founder 4 that leads to future product lines being acquired.



And in the mix of all of that is a major investor who comes in and assigns a board seat to one of their members. They are certainly not going to operate on your grunt calculator sliding rule, no way.



Is your model merely for the very early stages of a start up before any major business has been done? What am I missing here?


Either way, you state your model will assure an entrepreneur never has a problem with equity allocation again. You don’t know many lawyers if you are making this statement. That would be to assume you have a cure for the greed of human nature, which Im sure we can agree you don’t.


Again, not knocking your product. I realize you are getting buy in. I just think you are over simplifying its one size fits all sales pitch. But glad to find a miracle drug if by chance I am reading this wrong and you have something that covers such issues.

Harish Damodhardas Asar Entrepreneur, Investor, Investor is startups, stocks, Consultant,

February 23rd, 2018

Hi Sue,

If in the long run you see benefits for the business, maybe you should consider his/her request but re-negotiate the percentage, also pointing out that if a similar situation arises in near future wherein you get more business, then he/she should be open and fair to considering increasing your equity percentage. It is better to be with the devil you know than the devil you dont know. At the end of the day you should consider it as a top priority that the business continues, scales up.

This is just a suggestion, at the end of the day you are the best judge to decide what's best for you and your business.

Hope it is resolved amicably.

Harish

Aarif Qureshi Cofounder

February 19th, 2018

Hi Sue, As per my knowledge the partnership firm is very dependent on your mutual understanding. Yes I know you had already started the firm with legal contract between you and your partner but the things is that the mind set of people changes in some situations, and specially when it comes to the money.


What I can suggest to you is going forward please make sure that you both can have equally distribute tasks. For current situation the only solutions is to talk openly with him and realize him that you both have contributed equally to grow your business.


Hope that will help you..!!



Mike Moyer

Last updated on February 19th, 2018

@ David, I am delighted to see your response to my posting to this question because it gives me a chance to respond to some common misconceptions about the Slicing Pie model and equity splits in general. Below are my responses to your individual concerns. Thank you very much! -

YOUR MESSAGE: Mike @Mike Moyer-I appreciate your attempt to make equity allocation simpler. I think you are overselling the “fool proof” adjective, however certainly the diagnosis is worthy as a tool to get a general idea and track contributions. Once a person fully understands the difference between the Slicing Pie model and traditional models, he or she would be foolish to go with a traditional model. It’s just too risky. With traditional models, the chance of the split causing a dispute is higher than the chance of avoiding one! In that sense, Slicing Pie is not fool proof in that the foolish approach is to ignore what it offers. Unlike traditional models that are based on estimates and guesses and must be renegotiated when things change, Slicing Pie bases the split on knowable, logical, observable contributions. Each contribution is treated like a “bet” on the future outcome of the company. A person’s share of the company is based on that person’s share of the bets.

The challenge I see with your grunt calculator spreadsheet…and correct me if I am misunderstanding your system. But you are equating hours spent in a company to equity ownership. Theoretically, that sounds great, but realistically hours alone or even as a major factor does not nor should be used to value equity worth. Unless of course you are assuming, which is a pretty big assumption, that productivity of founder one is equal to the productivity of founder 2. I have rarely seen this to be the case. One of the biggest issues CEO’s I know have is that they not only work more hours than other execs in the company, but their hours spent are far more productive to the financial success of the company. And, on the flip result, I know founders who put in less hours but are smarter, and more productive than the CEO might be. Time is but one factor used in the allocation of equity in the Slicing Pie model because time is how most businesses pay employees. Most people are paid an annual salary or an hourly rate in regular intervals- all time-based measures. The amount someone is paid for their time varies based on their skills, education, experience, etc. Productive employees get paid more in salary and bonus that less productive employees. Unproductive employees eventually get fired and Slicing Pie will accommodate new employees, departing employees and participants with different commitment levels. CEO’s generally have a higher annual salary than other employees. So, a CEO working the same number of hours as a burger-flipper will generally deserve more equity. Similarly, the more hours he or she works will also cause him or her to build more ownership. Time is how people are paid. Just like weight is how hams are sold. Weight, in itself, is not an indicator of ham quality any more than time, in itself is not an indicator of employee productivity. The better the ham, the higher the price per pound, just like the more experienced the employee the higher the price per hour. If the higher price is worth it, the buyer will keep buying. When someone spends time on a company and is not paid, the fair market value of that person’s time becomes a bet along with any other bets he or she places. The problem with your assumption is a pretty big one, or at least can be as it incentivizes hours spent toward a startup instead of actual outcome. Again, it is better than nothing…but “fool proof” is a stretch as is “perfect equity split.” Productivity still matters just as it would if the person was getting paid a salary. The person’s boss would give a productive person a raise and he or she would fire an unproductive person. Slicing Pie reflects the actual contributions so there is no guess. In a traditional model you can ask ten different people their advice and you’ll get ten different recommendations. With Slicing Pie the inputs are what they are so there is no variation based on subjective opinion. Yes, you have to set fair market rates, but these are much easier to determine than future, unknown values. The other challenge is proper valuation and future valuation and the over all complexity and organic function of most startups. Lets say founder one spends 80 hours a week for several months developing and trying to seal a deal with a major partner. According to your Grunt Calculator, and again please correct me if I am misinterpreting this, but founder one increases his equity stance in the company based on hours, and the valuation of those hours. But lets say founder 2 has a past relationship with a major partner, and he seals the deal in a matter of two weeks. Taking it a step further though, founder one then utilizes the power of founder 2’s sealed partnership to attract and finally seal the deal for the company he has been trying to secure for the last several months. It becomes far more complex than your plug and equate grunt calculator. This is a good example: · Founder One: 80 hours = Major Partner · Founder Two: 2 weeks = Major Partner · Founder One: Leverages the second major partner to land a third The future value of each partnership is unknown. Founder One landed two partners that may or may not have more value than Founder Two’s partner. All we actually know is the time and energy invested (aka “bet”) on the acquisition of the partners. Basing equity allocation on the future value of the partnerships would be foolish because Founder Two’s partner could easily turn out to be a dud. Basing the split on knowable values is much smarter. Presumably, Founder Two was doing other things during the time One was pursuing the prospect. If the two Founders have similar rates, they will have similar equity holdings. Additionally, Founder Two could possibly command a higher fair market value because of his or her great connections. Let’s think about it differently: the value of the partnerships is knowable. If the deals are discrete, it would be better to pay a commission on the deal in which case each Founder would get the same equity if their deals were the same. In the third scenario they might split the commission. In the end, you have to ask yourself a simple question: IF I was going to pay for this person’s services HOW MUCH would I be willing to pay? You would negotiate this rate in advance of the work being done and you would simply pay it when it is done. If you can’t pay, no problem, it becomes a bet. Slicing Pie simply tracks the bets. Bets are always knowable. I am all for trying to evaluate a fairer equity percentage. Too many entrepreneurs, many of whom you see in these forums, naively do a 50-50 handshake deal at the beginning rather than really thinking through roles and contributions. 50-50 deals are extremely common and extremely dangerous. In your above example, both Founders would probably feel slighted if they had such a deal. The other issue of concern with your approach in an example similar to the above. 4 founders. Three have worked for 7 months starting the company. They are all engineers. One put $2M into the company, the other three are founders and equity players and have 7 months of 60 hours a week developing 4 prototypes. Only problem is 3 of those prototypes don’t work, or worse by the time they are completed a competitor has come out with a product that is similar enough and sends them 3 back to the drawing board. Technically, their time spent on at least three brings no value to the future valuation of the company. Its business and not charity. Their time should not be dismissed but in NO way should it be due equity merely because they spent time in the office. That is ridiculous. So is there an exception or quantifier in your formula for hours? Another great example. Imagine you worked as an engineer in a company that had plenty of cash and paid you a full market salary. You worked almost 2,000 hours on a project that failed. Should you give them your salary back? Just because a project failed doesn’t mean the team’s contribution didn’t matter. It would not be fair to ask you to return your salary. Startups, like all companies, make mistakes all the time. Now, if you habitually fail you would eventually get fired. Slicing Pie would protect the company from terminated employees, but it does not penalize failure, in itself. Similarly, the successful employees could be paid a nice bonus. If the bonus isn’t paid in cash, it’s a bet. In continuing, The fourth founder comes in though and sees an opportunity with one of the prototypes. He works two weeks and sets up a deal with the leading producer of products in that industry, a company that does $4B in sales a year. They agree to produce the product under their specific deal points and scale the roll out to major retailers. Hours wise he only has two weeks. Cache wise, it is huge because this corporation and a deal with them will attract future investors. But the actual equity value can not be determined at this time. Certainly the result is worth far more equity than the 7 months of time the engineers gained equity on 3 failed products. Year one may promise 2M in revenue. Year three may contribute 20M. But in year three, the company may also have developed a relationship with the company due to founder 4 that leads to future product lines being acquired. This, like all hypothetical situations, cannot be predicted. The future is unknowable. Slicing Pie is a logical formula that accommodates all eventualities. That’s what makes it work so well. In all your examples, founders would be at odds with a traditional equity split. Slicing Pie would automatically adjust. In this example, it’s the person’s job to do great things and he should be paid according to his skill. If he is not paid, it’s a bet. And in the mix of all of that is a major investor who comes in and assigns a board seat to one of their members. They are certainly not going to operate on your grunt calculator sliding rule, no way. Exactly. When the company gets a major investment it no longer needs Slicing Pie because it can use the investment to pay employees and other expense. If everyone is getting paid, they are not placing bets. The investor is thrilled that the team has a clean, conflict-free cap table based on what actually happened. Is your model merely for the very early stages of a start up before any major business has been done? What am I missing here? Yes, it is for early-stage, bootstrapped companies and is used prior to breakeven or Series A. Either way, you state your model will assure an entrepreneur never has a problem with equity allocation again. You don’t know many lawyers if you are making this statement. That would be to assume you have a cure for the greed of human nature, which Im sure we can agree you don’t. Most lawyers I know default to traditional models and many balk at Slicing Pie even though founder disputes are extremely common. Once they get it, however, they see it’s power. For example, one lawyer in Chicago estimates that 50% of the traditional equity arrangements winds up in dispute. However, after over 1,000 Slicing Pie deals disputes are no longer an issue. I quote Forbes: “the slicing pie model has virtually eliminated equity disputes among founders and problems that do arise can usually be addressed within the framework.” As a practice, I speak with lawyers for free about the model and most of them are pretty excited to hear about it an apply it. It really solves a lot of problems. There are firms all over the world that can help implement to comply with local laws. It’s not the cure for greed, but it is the antidote. Again, not knocking your product. I realize you are getting buy in. I just think you are over simplifying its one size fits all sales pitch. But glad to find a miracle drug if by chance I am reading this wrong and you have something that covers such issues. I know you’re not trying to knock it. You’re asking the right questions given your experience with traditional models and I’m happy to respond. In fact, my first Slicing Pie lawyer was a guy I met after he wrote an article about why the model would never work! I pitch Slicing Pie as a universal, one-size-fits all model for the allocation and recovery of equity in an early-stage, bootstrapped company. I stand by this assertion. The Slicing Pie books have been translated into eight languages and is used all over the world. Since the first version of the book in 2012 I’ve sold thousands of copies. I have yet to hear of a single dispute from a company that implemented the model as described by the books.

David M

February 15th, 2018

Show him the contract and the founding documents that stipulate wages and compensation. If you do not have this, you need to take a step back and create. Entrepreneurs usually get in these kinds of messes because they either knowingly cut corners or they do not have the competence to know they need contracts in place to begin with.

Anonymous

Last updated on February 15th, 2018

Hi Sue i I believe you guys have a written agreement on the share while registering the company. You need to meet your lawyer on this to clarify it.

It's obvious your partner feels he is doing more than you. Meet your lawyer, to make the decision. Hope you get it through with.

Boris Moyston COO/CFO, Founder, CEO

February 22nd, 2018

This is not a problem about equity split among partners, which is a discussion that should always happen before people form a company together. Before starting your partnership it would have been ideal to have had discussions and agreements about how to deal with top performing partners, to how to deal with dead equity partners, and everything in between.

Now you find your partnership in a situation where one partner may have had good intentions when initially agreeing to a 50-50 split, but has reconsidered that agreement in light of his recent success. This is a performance incentive problem.

There is no need to create more animosity and to put your company at risk by not dealing with the problem. You should consider using a third party executive compensation consultant to figure out the correct incentive formula for both of you and for the rest of your employees. There is a near standard protocol in place that many similar companies use to reward their executives. You should think about rewarding performance, but be certain that you are using a fair incentive structure. An experienced third party executive compensation consultant may bring a fair and unbiased decision that you both will feel better about.

Matt Stone Marketing expert and consultant at many high-growth startups

February 15th, 2018

I suggest trying an objective, 3rd party tool to evaluate what your founder equity split should be. This one from Gust asks the right questions, and you can use the results to guide the conversation with your co-founder: https://cofounders.gust.com