I am presently in a very similar situation. One possibile solution suggested to me by a lawyer friend would be to set up two companies: one jointly owned by you and your friend, and the other owned solely by yourself.

Your company would own the code you produced to date and then license it out to the jointly owned company. You could then build in an agreement where the jointly owned company has the right to purchase the code for a nominal sum at some future date if certain benchmarks are met.

This should give you the flexibility and protection you seem to want. You could agree to move forward with your friend as a business partner, but if he turns out to be a flop, you still have ownership over your code. At the same time, your partner should feel confident that if he performs his part, he won't be shortchanged.

As for the appropriate percentages, I am also currently grappling with this issue. I haven't settled on a figure yet, although I recall reading somewhere that the best deals are where both parties feel shortchanged.

I like that approach - very interesting. Have you actually tried it though? I'm just wondering if this is one of those great ideas in theory things or whether real, actual, high-quality folks are saying, "Yes" to this type of deal.

I have yet to do this, but if I end up working with my friend, it will likely only be under such a structure. Although it requires a more detailed and explicit contract up front, so long as the benchmarks, time frame, and price are reasonable and agreed upon, neither person should have any reason to complain.

The point is that both I and my friend/co-founder will know what we own and what we have to do, and we should both feel reasonably good about it. I won't feel like I've given anything away, and he will probably feel like he got a fair deal.

If he agrees at the outset and meets all the (negotiated) benchmarks, he will have a legal right to enforce the transfer to the joint company. If he refuses to structure the deal that way, then I will probably interpret his refusal as a sign that he is unfit for the job and possibly even untrustworthy.

That's very interesting. A friend also had a similar idea. My friend/cofounder would be working as freelance under my company and get a percentange of the revenues he generates (maybe 30%). If a certain goal is met, he would have the option to exchange it to a certain amount of share (exponentially increasing maybe even to 49%).

Well, whatever split you take-- you'll have a vesting period (2-4 years). So, another way to look at it is this:

After 4 years (or whatever the vesting period is), how much of a discrepancy will there be between the total value you've created and the total value he has created? How much discrepancy will there be in risks you've taken and the salaries you've missed? With your 3 month head start, that'd be 51 man-months vs. his 48 man-months.

At the end of the day, there's no formula here, and you trying to calculate in assorted risks and values really isn't going to come up with an correct number-- all it's going to do is give you a feeling that you went thru appropriate motions.

But, I can say that 99 times out of a hundred, the first 3 man months of a business are really not the most critical months... And it honestly sounds like you're over-estimating the value you've created and the risks you've eliminated.

Also, from the way you're describing it-- you're not looking to bring this guy on as a partner or co-founder-- you're describing a decidedly non-partner relationship. It sounds more like you're looking for someone who walks and talks like an employee, but is happy to take no salary and a minority stake.

You really haven't eliminated that much risk, though you've clearly accomplished a good amount in 3 months... But you really don't even know what sort of business you're creating yet and whether the market wants it.

I'd go 55-45 or 60-40 with each of you having a 4 year vesting period (yours could have a 1 year acceleration due to your head start).

There is definitely market potential, as the current approach is very manual, errorprone and not in time and our solution will save the customer lot's of time (which means money). I would say it's more complicated to sell a car to a customer coming to your store, than selling this.

As for the discrepancy in salaries, I earned twice as much as him when I was working. If I would have started at the same time he has started, I would be able to invest more than twice as much I'm investing now without having less on my bank account now. This must be worth something.

I can only answer one piece of your question, and it's just a suggestion: agree to allocate your shares over time. Set out a schedule (say, every quarter) that you'll use to decide who deserves what portion of the equity. Have guidelines around work expectations and performance goals, and include a 3rd party in your meetings if you need to.

That way you can closely tie compensation to performance, and there are no surprises because each party to the agreement knows what to expect (even if you both work with 65/35 in mind).

It sounds bizarre, but it's not so uncommon in practice. Case in point, a company that stands out in my mind as having adopted such an approach did so on the advisement of its legal team.

>Is it common that all shareholders have to agree to sell a company or is this more uncommon?

My gut tells me the need to sell is uncommon. Usually there's a buyout clause in the Operating Agreement that specifies how ownership will change in the event that one of the firm's managers leaves (or dies): http://www.docstoc.com/docs/294674/Sample-LLC-Operating-Agre...

At first I proposed a 90:10 offer with options to reach 35% but he didn't agree with that. The current plan (to take away his shares if he doesn't meet his goals) doens't differ much from this though.

FAR too complex - you already sound like you're demeaning someone who is going to have co-founder as part of his title. How's it going to be three to six months from now? Are you EVER going to see him as an equal? Because if you don't, the entire project will collapse.

And by the way, you'd be shocked how much of a business person you'll need even with your first idea - a person to do relations while you code, a person to do design, UI, all of that (I'm on the business side, but I've piled on a load of coding and non-coding skills to make sure I carry my weight with any web start-up).

If you don't plan to seek funding it doesn't matter what you do. If you do plan to seek funding, figure out a way to make it a 50/50 split if you are going to have a cofounder, any other arrangement will raise eyebrows and cost you time and legal fees when you try to get funding.

I earned twice as much as him when I was working and quit my job and didn't earn a salary for 3 months. These 3 months alone are worth more than he is investing. The sum we both invest should be sufficent to get the company running for at least 10 months without any revenues. If it turns out to be a viable idea, we both (or at least I) can invest some more money or seek for an external investor. I don't think a 50/50 split would be fair, as I already proved that I could do my technical park, and he only joined afterwards and has not yet shown or done his part.

If everything fails, there is still the option of selling the software. At least my former company will be very interested in what I was doing.

I don't disagree with what's fair, just saying that if you have a non 50/50 arrangement then you are probably going to have a different sense of when it's time to cash out than he is.

Why not just make him your first employee and compensate him with incentive stock options? He would not be a partner or a founder, but a fairly large potential shareholder if things go well.

What does he want? It's fine for you to come up with in your head all of this but does it match his expectations? He could be expecting 50/50 and want to walk when you show him something complicated.

What have you done to protect yourself from him starting a competitor if the two of you can't come to terms?

He said a 65:35 deal was ok for him.

If it turns out we are going in different directions, I think I'm going to have a big head start on him. Business idea 1 is undoable for him. Business idea 2 will be possible to do for him, as the software is a very much simplified version of business idea 1 with less features.

I already completed nearly all of the software, so I could start much earlier than he does. (He would have to get someone creating the software for him). If he decides not to accept, he probably would also ahve to leave the incubator which would also leave a negative annotation on him. (also if we would be both be selling the same thing) But I don't think it will come to this and it would also not be in my interest or his.

I haven't done anything from protecting my idea. (no NDA...)

Seems fair to me - you wanted 65/35 and he's happy with that. I might put in clauses that would allow him to make it 60/40 if he turns out to be a miracle worker though; nothing wrong with a little extra incentive. 60% of $30,000,000 exit is better than 65% of a $20,000,000 exit...

Did you sign the deal?

You're talking 65:35 of... zero right now. I'd say he gets that share if he sticks with it (meaning you stay in business) for three years.

Additionally if you make this such a large pain point, then are they the correct co-founder to begin with?