Cofounder

Should founders charge their start up for services performed?

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

March 3rd, 2015

A co-founder of a start up firm that produces a consumer product is charging his company with a formal invoice for having manufactured the items required to fulfill their very first order.  The total invoiced was for HALF of the total sales amount.  the other 3 co founders are not happy with this.

I can't seem to get through to this co founder that this is not the best way to do this.
any thoughts or suggestions for how this can be managed?

Thank you!
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PJ Entrepreneur Global Entrepreneur

March 4th, 2015

Is the start up firm producing the product or buying it from the co-founder's company and adding 100% profit? If the co-counder's company did all the work, they deserve to be paid and have a reasonable profit. 

Please give more details for a better answer. You should have discussed this before asking him to manufacture the products. Are you really expecting him to give them to the start up for free.

PJ Entrepreneur Global Entrepreneur

March 4th, 2015

For me, this is what makes the difference: "The company they started together has been paying the rent of the studio."

If co-founder 2 was doing this in an independent business that he had previous to this venture, it could make sense for him to invoice for the product. BUT, this is not the case, and if they are going to have success working together they need to be transparent about everything and split the profits as agreed. The "company" needs to know the details of the manufacturing process as well.

If this can not be resolved soon, it seems that this "company" will not work out. Until it is resolved, co-founder 1 should submit an invoice for $75.00 per hour for marketing efforts.

Jason Oliver Founder and Technology & Product Executive

March 4th, 2015

For his services or for the actual cost of the manufactured goods?

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

March 4th, 2015

Jason and PJ: thanks for your help...

The situation is the following:

There are 2 co-founders who invented the product.  they hold a design patent jointly.
Co-founder 1 is the expert on the use of the product.
Co-founder 2 is the expert in manufacturing the product.
Co-founder 2 has his own manufacturing studio- where the product is made.
The company they started together has been paying the rent of the studio.

Both have agreed to a 40/40 split.  They gave 10% to 2 other partners who provided funding.

Co-founder 1 does all the marketing, promoting, etc.  Co-founder 2 sits in his studio and waits for orders to come in.  This was ok because Co-founder 2 also works on other income producing work not related to the company (he has a production firm where he is the only resource).

Co-founder 1 secured their first deal where  firm has purchased 75 of their products at a 30% discount.  The total order was for $16k.  

Co-founder 2 is the ONLY person who knows how to make the product.  He has not been willing to share the production process up to this point.  He covered the up-front costs of securing the material needed to create the products.  He remitted an invoice to Co-founder 1 charging not only the cost of the material, but an hourly fee for his work at $75/hr.  in essence, his invoice is for more than half the total sales amount.  

in addition, he expects to receive his 40% of the "profits after expenses."

How do we create a fair and equitable situation for all 4 involved?
The 2 who provided capital feel that Co-founder 2 is 'double-dipping."
Is it customary for co-founders to charge their start-up for services rendered?

I appreciate any and all suggestions.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

March 5th, 2015

This seems less an ethical issue and more a failure to document their understanding up front. It's not too late for them to have a discussion, but what they really need now is a time machine.

Vijay MD Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)

March 5th, 2015

Sounds like this team needs to hit the reset button.  There's no way this should have been a surprise.

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

March 5th, 2015

I agree with the majority in that an agreement should have been drafted and executed at the beginning. We cant seem to get co-founder 2 out of the employee/contractor mentality.  
If funds are not retained in the company, they will be unable to fund additional production requirements.

My thoughts are to create an agreement that supports company growth, develop a production plan with growth projections and agree on an outsourcing strategy that focuses on quality and cost.     

I welcome additional suggestions and/or challenges.