I have been working on a concept and have some consultants supporting me.
One of the consultants has expressed interest in joining me to form a business entity as a cofounder.
Till now I have borne all expenses towards concept design and development.
Please advise how I capture this investment in the equity while discussing with the potential co founder.
it depends how much efforts and investment he is contributing to business.
I highly recommend that you read Slicing Pie by Mike Moyer. I am not a fan of giving chunks of a business away on a promise of delivery. Slicing Pie allows you to reward actual contributions, including cash and non-cash, in a rational, fair way. He provides a tool that allows you to keep everything visible and above board so everyone can see how the slices are apportioned. Then when it is time to do an equity round (or you have enough money to actually pay market rates), then the slices earned determine the equity.
Use the current arrangement you have with the consultant to determine the equity. Let's say you are paying him/her $40/hr, start putting that rate towards equity instead of paying cash. So 100 hrs. would be $4,000 divided by the valuation you give your business.
You should probably set a cap on the valuation, and be realistic. Consider the time and money you have invested and your current cashflow (if any). If you are not making any money then you really shouldn't project any into the equation. You may realize that it is too early to give any equity because you are unsure what your idea will become, that is very reasonable.
Both you and your partner should have some potential upside and downside.
Don't just give away a portion of your company. You have no idea how dedicated this person will be in the future or what value they will bring.
it depends on what he is bringing to the table, in terms of investments and work, if he has one of those skills without which you can not run the company, then go ahead, if not then stick to yourself, but don't become Dave, you know who Dave is? dave is the guy who thought to run the company by myself, he succeeded in the short term but failed miserably in the long term. On the other note your equity is sweat equity, so think about it before handing it over, i for instance can bring you a team of developers, managers, business experts and if needed funding for a 30 % equity, so try to understand the value of the equity.
Think carefully before taking on a co-founder. It's less about the economics and more about working in tandem with each other, which can hit major bottleneck.
All the best.
Ajey, percentage of equity share to offer a co-founder, especially when you have a prototype already in play is always tricky. Sometimes, when we are inside looking out, it might be difficult to assess the value they bring as well, especially if the business function they perform or value they bring is difficult for us to assess. For example, a CTO might always feel that technology/IP creation is the core of an organization whereas someone who drives business acquisition would feel the same way about revenue. Might be a good idea to have someone (a mentor of sorts) senior who knows you and your business take an objective fair-minded view of the situation and appraise you on how you might do this and what you might want to offer your future partner. Just my two cents